Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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**x****                             ****QUARTERLY REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2009**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                    to                    **

 

**Commission file number 1-14762**

 

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**THESERVICEMASTER COMPANY**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                                                | ** ** | **36-3858106**                                   |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------|
| (State or other jurisdiction ofincorporation or organization) |       | (IRS Employer Identification No.) |

 

**860 Ridge Lake Boulevard, Memphis, Tennessee****· 38120**

(Address of principal executive offices)    (Zip Code)

 

**901-597-1400**

(Registrant’s telephone number, including area code)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

 

Indicate bycheck mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o  No o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer x                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes  o  No x

 

The registrant is aprivately held corporation and its equity shares are not publicly traded. At August 13,2009, 1,000 shares of the registrant’s common stock were outstanding, all ofwhich were owned by CDRSVM Holding, Inc.

 

 

 

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**TABLEOF CONTENTS**

 
| ** **                                                                                                             | **Page  No.** |
|------------------------------------------------------------------------------------------------------------------------|---------------|
| THE  SERVICEMASTER COMPANY (Registrant) -                                                                              |          |
|                                                                                                                   |          |
| Part I.  Financial Information                                                                                    |          |
|                                                                                                                   |          |
| Item 1: Financial  Statements (Unaudited)                                                                              |          |
|                                                                                                                   |          |
| Condensed Consolidated Statements of  Operations for the three months ended June 30, 2009 and June 30,  2008 | 3             |
| ** **                                                                                                             | ** **    |
| Condensed Consolidated Statements of  Operations for the six months ended June 30, 2009 and June 30, 2008    | 4             |
| ** **                                                                                                             | ** **    |
| Condensed Consolidated Statements of  Financial Position as of June 30, 2009 and December 31, 2008           | 5             |
| ** **                                                                                                             | ** **    |
| Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  2009 and June 30, 2008   | 6             |
|                                                                                                                   |          |
| Notes to  Condensed Consolidated Financial Statements                                                                  | 7             |
| ** **                                                                                                             | ** **    |
| Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                   | 30            |
| ** **                                                                                                             | ** **    |
| Item  3: Quantitative and Qualitative Disclosures About Market Risk                                               | 53            |
| ** **                                                                                                             | ** **    |
| Item 4T:  Controls and Procedures                                                                                      | 54            |
| ** **                                                                                                             | ** **    |
| Part II. Other Information                                                                                        | 54            |
| ** **                                                                                                             | ** **    |
| Item 6:  Exhibits                                                                                                      | 54            |
|                                                                                                                   |          |
| Signature                                                                                                              | 55            |

 

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Table of Contents

 

**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

### **THESERVICEMASTER COMPANY**

### **CondensedConsolidated Statements of Operations (Unaudited)**

*(Inthousands)*

 
| ** **                                                                 | ** ** | **Three months ended********June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Operating Revenue                                                     |       | $                                           | 957,292    |   | $ | 997,305 |   |
|                                                                       |       |                                        |       |   |   |
| Operating Costs and Expenses:                               |       |                                        |       |   |   |
| Cost of services rendered and products sold  |       | 553,373                                     |       | 589,734 |   |
| Selling and administrative expenses                         |       | 239,929                                     |       | 247,114 |   |
| Amortization expense                                                       |       | 40,401                                      |       | 41,968 |   |
| Merger related charges                                                     |       | 1,154                                       |       | 305 |   |
| Restructuring charges                                                      |       | 4,430                                       |       | 4,005 |   |
| Total operating costs and expenses                     |       | 839,287                                     |       | 883,126 |   |
|                                                                       |       |                                        |       |   |   |
| Operating Income                                                      |       | 118,005                                     |       | 114,179 |   |
|                                                                       |       |                                        |       |   |   |
| Non-operating Expense (Income):                                  |       |                                        |       |   |   |
| Interest expense                                                      |       | 74,656                                      |       | 83,425 |   |
| Interest and net investment   income                        |       | (3,395                                      | )          | (4,164 | ) |
| Other expense                                                         |       | 179                                         |       | 145 |   |
|                                                                       |       |                                        |       |   |   |
| Income from Continuing Operations  before Income Taxes |       | 46,565                                      |       | 34,773 |   |
| Provision for income taxes                                       |       | 24,173                                      |       | 13,947 |   |
|                                                                       |       |                                        |       |   |   |
| Income from Continuing Operations                                |       | 22,392                                      |       | 20,826 |   |
|                                                                       |       |                                        |       |   |   |
| Loss from discontinued operations, net of  income taxes                    |       | (107                                        | )          | (2,736 | ) |
| Net Income                                                            |       | $                                           | 22,285     |   | $ | 18,090 |   |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

### **THESERVICEMASTER COMPANYCondensed Consolidated Statements of Operations (Unaudited)**

*(Inthousands)*

* *
| ** **                                                                              | ** ** | **Six months ended********June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                              | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Operating Revenue                                                                  |       | $                                         | 1,603,219  |   | $ | 1,629,536 |   |
|                                                                                    |       |                                      |       |   |   |
| Operating Costs and Expenses:                                            |       |                                      |       |   |   |
| Cost of services rendered and products sold               |       | 947,773                                   |       | 1,007,102 |   |
| Selling and administrative expenses                                      |       | 413,692                                   |       | 418,230 |   |
| Amortization expense                                                                    |       | 80,710                                    |       | 92,642 |   |
| Merger related charges                                                                  |       | 1,448                                     |       | 355 |   |
| Restructuring charges                                                                   |       | 12,913                                    |       | 7,330 |   |
| Total operating costs and expenses                                  |       | 1,456,536                                 |       | 1,525,659 |   |
|                                                                                    |       |                                      |       |   |   |
| Operating Income                                                                   |       | 146,683                                   |       | 103,877 |   |
|                                                                                    |       |                                      |       |   |   |
| Non-operating Expense (Income):                                               |       |                                      |       |   |   |
| Interest expense                                                                   |       | 151,322                                   |       | 173,011 |   |
| Interest and net investment loss                                         |       | 1,366                                     |       | 1,881 |   |
| Gain on extinguishment of debt                                                          |       | (46,106                                   | )          | — |   |
| Other expense                                                                      |       | 379                                       |       | 277 |   |
|                                                                                    |       |                                      |       |   |   |
| Income  (Loss) from Continuing Operations  before Income Taxes |       | 39,722                                    |       | (71,292 | ) |
| Provision (Benefit) for income taxes                                          |       | 16,618                                    |       | (17,024 | ) |
|                                                                                    |       |                                      |       |   |   |
| Income (Loss)  from Continuing Operations                                     |       | 23,104                                    |       | (54,268 | ) |
|                                                                                    |       |                                      |       |   |   |
| Loss from discontinued operations, net of income  taxes                                 |       | (270                                      | )          | (3,484 | ) |
| Net Income (Loss)                                                                  |       | $                                         | 22,834     |   | $ | (57,752 | ) |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

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**THESERVICEMASTER COMPANY**

## **Condensed Consolidated Statements of Financial Position**

*(In thousands, except share data)*

 
| ** **                                                                   | ** ** | **As of********June 30,********2009** | ** ** | **As of********December 31,********2008** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                   | ** ** | **(Unaudited)**                            | ** ** | **(Audited)**                                  | ** ** |
| Assets                                                                       |       |                                       |       | ** **                                     |       |
| Current Assets:                                                              |       |                                       |       |                                           |       |
| Cash and cash equivalents                                                    |       | $                                          | 368,160    |                                           | $          | 405,587 |   |
| Marketable securities                                                        |       | 24,309                                     |       | 22,928                                         |       |
| Receivables, less allowance of $23,044 and  $21,138, respectively            |       | 389,928                                    |       | 335,927                                        |       |
| Inventories                                                                  |       | 81,160                                     |       | 80,018                                         |       |
| Prepaid expenses and other assets                                            |       | 73,096                                     |       | 37,648                                         |       |
| Deferred customer acquisition costs                                          |       | 54,527                                     |       | 36,514                                         |       |
| Deferred taxes                                                               |       | 32,905                                     |       | 42,945                                         |       |
| Assets of discontinued operations                                            |       | 49                                         |       | 412                                            |       |
| Total Current Assets                                                         |       | 1,024,134                                  |       | 961,979                                        |       |
| Property and Equipment:                                                      |       |                                       |       |                                           |       |
| At cost                                                                      |       | 326,017                                    |       | 287,818                                        |       |
| Less: accumulated depreciation                                               |       | (103,572                                   | )          | (72,189                                        | )          |
| Net property and equipment                                                   |       | 222,445                                    |       | 215,629                                        |       |
|                                                                         |       |                                       |       |                                           |       |
| Other Assets:                                                                |       |                                       |       |                                           |       |
| Goodwill                                                                     |       | 3,097,843                                  |       | 3,093,909                                      |       |
| Intangible assets, primarily trade names,  service marks and trademarks, net |       | 2,889,585                                  |       | 2,967,984                                      |       |
| Notes receivable                                                             |       | 24,412                                     |       | 25,628                                         |       |
| Long-term marketable securities                                              |       | 102,785                                    |       | 110,134                                        |       |
| Other assets                                                                 |       | 36,358                                     |       | 35,350                                         |       |
| Debt issuance costs                                                          |       | 74,057                                     |       | 83,014                                         |       |
| Total Assets                                                                 |       | $                                          | 7,471,619  |                                           | $          | 7,493,627 |   |
|                                                                         |       |                                       |       |                                           |       |
| Liabilities and Shareholder’s Equity                                    |       |                                       |       |                                           |       |
|                                                                         |       |                                       |       |                                           |       |
| Current Liabilities:                                                         |       |                                       |       |                                           |       |
| Accounts payable                                                             |       | $                                          | 116,442    |                                           | $          | 89,242 |   |
| Accrued liabilities:                                                         |       |                                       |       |                                           |       |
| Payroll and related expenses                                                 |       | 76,269                                     |       | 83,036                                         |       |
| Self-insured claims and related expenses                                     |       | 94,487                                     |       | 91,923                                         |       |
| Other                                                                        |       | 165,793                                    |       | 202,174                                        |       |
| Deferred revenue                                                             |       | 489,756                                    |       | 443,426                                        |       |
| Liabilities of discontinued operations                                       |       | 2,912                                      |       | 4,870                                          |       |
| Current portion of long-term debt                                            |       | 219,105                                    |       | 221,269                                        |       |
| Total Current Liabilities                                                    |       | 1,164,764                                  |       | 1,135,940                                      |       |
|                                                                         |       |                                       |       |                                           |       |
| Long-Term Debt                                                               |       | 3,937,610                                  |       | 4,044,823                                      |       |
|                                                                         |       |                                       |       |                                           |       |
| Other Long-Term Liabilities:                                                 |       |                                       |       |                                           |       |
| Deferred taxes                                                               |       | 991,217                                    |       | 981,746                                        |       |
| Liabilities of discontinued operations                                       |       | 4,059                                      |       | 4,077                                          |       |
| Other long-term obligations, primarily  self-insured claims                  |       | 195,970                                    |       | 194,682                                        |       |
| Total Other Long-Term Liabilities                                            |       | 1,191,246                                  |       | 1,180,505                                      |       |
|                                                                         |       |                                       |       |                                           |       |
| Commitments and Contingencies (See Note 4)                                   |       |                                       |       |                                           |       |
|                                                                         |       |                                       |       |                                           |       |
| Shareholder’s Equity:                                                   |       |                                       |       |                                           |       |
| Common  stock $0.01 par value, authorized 1,000 shares; issued 1,000 shares  |       | —                                     |       | —                                         |       |
| Additional paid-in capital                                                   |       | 1,442,332                                  |       | 1,438,432                                      |       |
| Retained deficit                                                             |       | (227,085                                   | )          | (249,919                                       | )          |
| Accumulated other comprehensive loss                                         |       | (37,248                                    | )          | (56,154                                        | )          |
| Total Shareholder’s Equity                                              |       | 1,177,999                                  |       | 1,132,359                                      |       |
| Total Liabilities and Shareholder’s Equity                              |       | $                                          | 7,471,619  |                                           | $          | 7,493,627 |   |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

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**THESERVICEMASTER COMPANY**

## **Condensed Consolidated Statements of Cash Flows (Unaudited)**

*(Inthousands)*

 
| ** **                                                                         | ** ** | **Six months ended********June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Cash and Cash Equivalents at Beginning of  Period                                  |       | $                                         | 405,587    |   | $ | 207,219 |   |
|                                                                               |       |                                      |       |   |   |
| Cash Flows from Operating Activities from  Continuing Operations:                  |       |                                      |       |   |   |
| Net Income (Loss)                                                                  |       | 22,834                                    |       | (57,752 | ) |
| Adjustments to reconcile net loss to net cash  provided from operating activities: |       |                                      |       |   |   |
| Loss from discontinued operations                                                  |       | 270                                       |       | 3,484 |   |
| Depreciation expense                                                               |       | 32,550                                    |       | 25,951 |   |
| Amortization expense                                                               |       | 80,710                                    |       | 92,642 |   |
| Amortization of debt issuance costs                                                |       | 9,263                                     |       | 18,269 |   |
| Gain on extinguishment of debt                                                     |       | (46,106                                   | )          | — |   |
| Deferred income tax provision (benefit)                                            |       | 11,480                                    |       | (31,621 | ) |
| Option and restricted stock expense                                                |       | 3,901                                     |       | 3,401 |   |
| Restructuring charges                                                              |       | 12,913                                    |       | 7,330 |   |
| Cash payments related to restructuring charges                                     |       | (9,955                                    | )          | (16,236 | ) |
| Merger related charges                                                             |       | 1,448                                     |       | 355 |   |
| Change in working capital, net of acquisitions:                                    |       |                                      |       |   |   |
| Current income taxes                                                               |       | 5,202                                     |       | 8,680 |   |
| Receivables                                                                        |       | (52,050                                   | )          | (59,455 | ) |
| Inventories and other current assets                                               |       | (59,565                                   | )          | (88,273 | ) |
| Accounts payable                                                                   |       | 22,425                                    |       | 22,291 |   |
| Deferred revenue                                                                   |       | 46,003                                    |       | 88,910 |   |
| Accrued liabilities                                                                |       | (17,757                                   | )          | (4,056 | ) |
| Other, net                                                                         |       | 7,663                                     |       | 4 |   |
| Net Cash Provided from Operating Activities  from Continuing Operations            |       | 71,229                                    |       | 13,924 |   |
|                                                                               |       |                                      |       |   |   |
| Cash Flows from Investing Activities from  Continuing Operations:                  |       |                                      |       |   |   |
| Property additions                                                                 |       | (38,893                                   | )          | (18,121 | ) |
| Sale of equipment and other assets                                                 |       | 1,955                                     |       | 4,560 |   |
| Acquisition of The ServiceMaster Company                                           |       | (1,119                                    | )          | (20,957 | ) |
| Other business acquisitions, net of cash  acquired                                 |       | (7,268                                    | )          | (9,961 | ) |
| Notes receivable, financial investments and  securities, net                       |       | 3,968                                     |       | 76,987 |   |
| Net Cash (Used for) Provided from Investing  Activities from Continuing Operations |       | (41,357                                   | )          | 32,508 |   |
|                                                                               |       |                                      |       |   |   |
| Cash Flows from Financing Activities from  Continuing Operations:                  |       |                                      |       |   |   |
| Borrowings of debt                                                                 |       | —                                    |       | 182,000 |   |
| Payments of debt                                                                   |       | (64,807                                   | )          | (217,288 | ) |
| Debt issue costs paid                                                              |       | (369                                      | )          | (99 | ) |
| Net Cash Used for Financing Activities from Continuing Operations                  |       | (65,176                                   | )          | (35,387 | ) |
|                                                                               |       |                                      |       |   |   |
| Cash Flows from Discontinued Operations:                                           |       |                                      |       |   |   |
| Cash (used for) provided from operating  activities                                |       | (1,209                                    | )          | 7,389 |   |
| Cash used for investing activities                                                 |       | (914                                      | )          | (191 | ) |
| Cash used for financing activities                                                 |       | —                                    |       | (96 | ) |
| Net Cash (Used for) Provided from Discontinued  Operations                         |       | (2,123                                    | )          | 7,102 |   |
|                                                                               |       |                                      |       |   |   |
| Cash (Decrease) Increase During the Period                                         |       | (37,427                                   | )          | 18,147 |   |
|                                                                               |       |                                      |       |   |   |
| Cash and Cash Equivalents at End of Period                                         |       | $                                         | 368,160    |   | $ | 225,366 |   |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

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**THESERVICEMASTER COMPANY**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**Note 1.Basis of Presentation**

 

The condensedconsolidated financial statements include the accounts of The ServiceMasterCompany and its subsidiaries, collectively referred to as the “Company” or “ServiceMaster”.

 

On March 18,2007, ServiceMaster entered into an Agreement and Plan of Merger (the “MergerAgreement”) with ServiceMaster Global Holdings, Inc. (formerly CDRSVMTopco, Inc.) (“Holdings”) and CDRSVM Acquisition Co., Inc., anindirect wholly owned subsidiary of Holdings (“Acquisition Co.”). The MergerAgreement provided that, upon the terms and subject to the conditions set forthin the Merger Agreement, Acquisition Co. would merge with and intoServiceMaster, with ServiceMaster as the surviving corporation (the “Merger”).

 

On July 24,2007 (the “Closing Date”), the Merger was completed, and each issued andoutstanding share of ServiceMaster common stock, other than shares held byServiceMaster or Holdings or their subsidiaries and shares held by stockholderswho validly perfected their appraisal rights under Delaware law, was convertedinto the right to receive $15.625 in cash (the “Merger Consideration”). Eachshare of ServiceMaster common stock owned by ServiceMaster, Holdings orAcquisition Co. or any of their respective direct or indirect wholly-ownedsubsidiaries was cancelled and retired, and no consideration was paid inexchange for it.

 

Immediatelyfollowing the completion of the Merger, all of the outstanding capital stock ofHoldings, the ultimate parent company of ServiceMaster, was owned by investmentfunds sponsored by, or affiliated with, Clayton, Dubilier & Rice, Inc.(“CD&R”), Citigroup Private Equity L.P., BAS Capital FundingCorporation and J.P. Morgan Ventures Corporation (collectively, the “EquitySponsors”).

 

Equitycontributions totaling $1,431 million from the Equity Sponsors, togetherwith (i) borrowings under a new $1,150 million senior unsecured interimloan facility (“Interim Loan Facility”), (ii) borrowings under a new$2,650 million senior secured term loan facility and (iii) cash onhand at ServiceMaster, were used, among other things, to finance the aggregateMerger Consideration, to make payments in satisfaction of other equity-basedinterests in ServiceMaster under the Merger Agreement, to settle existinginterest rate swaps, to redeem or provide for the repayment of certain of theCompany’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150 millionpre-funded letter of credit facility (together with the senior secured termloan facility, the “Term Facilities”) were used to replace and/or secureletters of credit previously issued under a ServiceMaster credit facility thatwas terminated as of the Closing Date. On the Closing Date, the Company alsoentered into, but did not draw under, a new $500 million senior securedrevolving credit facility (the “Revolving Credit Facility”).

 

The Interim LoanFacility matured on July 24, 2008. On the maturity date, outstandingamounts under the Interim Loan Facility were converted on a one to one basisinto 10.75%/11.50% senior toggle notes maturing in 2015 (“Permanent Notes”).The Permanent Notes were issued pursuant to a refinancing indenture. Inconnection with the issuance of Permanent Notes, ServiceMaster entered into aregistration rights agreement (the “Registration Rights Agreement”), pursuantto which ServiceMaster filed with the SEC a registration statement with respectto the resale of the Permanent Notes, which was declared effective on January 16,2009. ServiceMaster’s obligation under the Registration Rights Agreement tokeep the registration statement effective has terminated. Accordingly,ServiceMaster may choose to deregister the Permanent Notes and terminate theeffectiveness of the registration statement at any time.

 

The condensedconsolidated financial statements have been prepared by the Company inaccordance with generally accepted accounting principles in the United States (“GAAP”)and pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”). The Company recommends that the quarterly condensedconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and the notes thereto included in the Company’s AnnualReport on Form 10-K filed with the SEC for the year ended December 31,2008. The condensed consolidated financial statements reflect all adjustmentswhich are, in the opinion of management, necessary for the fair presentation ofthe financial position, results of operations and cash flows for the interimperiods presented. All intercompany transactions and balances have beeneliminated in consolidation. The results of operations for any interim periodare not necessarily indicative of the results which might be achieved for afull year.

 

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**Note 2. Significant AccountingPolicies**

 

The Company’s significantaccounting policies are included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008. The following selected accountingpolicies should be read in conjunction with that Annual Report on Form 10-K.

 

Revenues from lawn careand pest control services, as well as liquid and fumigation termiteapplications, are recognized as the services are provided. Revenues fromlandscaping services are recognized as they are earned based upon contractarrangements or when services are performed for non-contractual arrangements.The Company eradicates termites through the use of baiting systems, as well asthrough non-baiting methods (e.g., fumigation or liquid treatments). Termiteservices using baiting systems, termite inspection and protection contracts, aswell as home warranty services, are frequently sold through annual contractsfor a one-time, upfront payment. Direct costs of these contracts (service costsfor termite contracts and claim costs for warranty contracts) are expensed asincurred. The Company recognizes revenue over the life of these contracts inproportion to the expected direct costs. Those costs bear a direct relationshipto the fulfillment of the Company’s obligations under the contracts and arerepresentative of the relative value provided to the customer (proportionalperformance method). Home service contract revenue is recognized based on theexpected emergence of total claim costs. The Company regularly reviews itsestimates of direct costs for its termite bait and home service contracts andadjusts the estimates when appropriate. Revenue from trade name licensing arrangementsis recognized when earned.

 

The Company has franchiseagreements in its TruGreen LawnCare, Terminix, ServiceMaster Clean, MerryMaids, AmeriSpec and Furniture Medic businesses. Franchise revenue (which inthe aggregate represents approximately four percent of consolidated revenuefrom continuing operations) consists principally of continuing monthly feesbased upon the franchisee’s customer level revenue. Monthly fee revenue isrecognized when the related customer level revenue is reported by the franchiseeand collectibility is reasonably assured. Franchise revenue also includesinitial fees resulting from the sale of a franchise. These fees are fixed andare recognized as revenue when collectibility is reasonably assured and allmaterial services or conditions relating to the sale have been substantiallyperformed. Total profits from the franchised operations (excluding trade namelicensing) were approximately $14 million**and $18million for the three months ended June 30, 2009 and 2008, respectively,and consolidated operating income from continuing operations was approximately$118 million and $114 million for the three months ended June 30, 2009 and2008, respectively. Total profits from the franchised operations (excludingtrade name licensing) were approximately $30 million**and$32 million for the six months ended June 30, 2009 and 2008, respectively,and consolidated operating income from continuing operations was approximately$147 million and $104 million for the six months ended June 30, 2009 and2008, respectively. We evaluate the performance of our franchise businessesbased primarily on operating profit before corporate general and administrativeexpenses, interest expense and amortization of intangible assets. The portionof total franchise fee income related to initial fees received from the sale offranchises was immaterial to the Company’s condensed consolidated financialstatements for all periods.

 

The Company had $490million and $443 million of deferred revenue at June 30, 2009 and December 31,2008, respectively. Deferred revenue consists primarily of payments receivedfor annual contracts relating to home service contracts, termite baiting,termite inspection, pest control and lawn care services.

 

Customer acquisitioncosts, which are incremental and direct costs of obtaining a customer, aredeferred and amortized over the life of the related contract in proportion torevenue recognized. These costs include sales commissions and direct sellingcosts which can be shown to have resulted in a successful sale.

 

TruGreen LawnCare hassignificant seasonality in its business. In the winter and spring, thisbusiness sells a series of lawn applications to customers which are renderedprimarily in March through October (the production season). Thisbusiness incurs incremental selling expenses at the beginning of the year thatdirectly relate to successful sales for which the revenues are recognized inlater quarters. On an interim basis, TruGreen LawnCare defers these incrementalselling expenses, pre-season advertising costs and annual repairs andmaintenance procedures that are performed primarily in the first quarter. Thesecosts are deferred and recognized in proportion to the contract revenue overthe production season, and are not deferred beyond the fiscal year-end. Otherbusiness segments of the Company also defer, on an interim basis, advertisingcosts incurred early in the year. These pre-season costs are deferred andrecognized approximately in proportion to revenue over the balance of the yearand are not deferred beyond the fiscal year-end.

 

The cost ofdirect-response advertising at Terminix and TruGreen LawnCare, consistingprimarily of direct-mail promotions, is capitalized and amortized over itsexpected period of future benefits.

 

The fair values of theCompany’s financial instruments reflect the amounts that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date (exit price). The fair

 

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value estimates presentedin this report are based on information available to the Company as of June 30,2009 and December 31, 2008.

 

The preparation of thecondensed consolidated financial statements requires management to make certainestimates and assumptions required under GAAP which may differ from actualresults. Disclosures in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2008 presented the significant areas that requirethe use of management’s estimates and discussed how management formed itsjudgments. The areas discussed included revenue recognition; the allowance foruncollectible receivables; accruals for self-insured retention limits relatedto medical, workers’ compensation, auto and general liability insurance claims;accruals for home service contract and termite damage claims; the possibleoutcome of outstanding litigation; accruals for income tax liabilities as wellas deferred tax accounts; the deferral and amortization of customer acquisitioncosts; useful lives for depreciation and amortization expense; the valuation ofmarketable securities; and the valuation of tangible and intangible assets andgoodwill.

 

**Note 3. Restructuring Charges**

 

The Company is engaged ina reorganization and restructuring of certain of its businesses and supportfunctions known as Fast Forward. Among the purposes of Fast Forward is toeliminate layers and bureaucracy and simplify work processes in order to betteralign the Company’s work processes around its operational and strategicobjectives. Fast Forward is being implemented in phases. The first phaseinvolved, among other things, a reduction in work force and various processimprovements, including the closing of American Home Shield’s call centerlocated in Santa Rosa, California. The second phase includes, among otherthings, the organization of certain corporate support functions into centers ofexcellence which are expected to deliver higher quality services to ourbusiness units at lower costs, the outsourcing to third party vendors ofvarious business activities that currently are handled internally, as well asother employee workforce reductions expected to result in cost-savings. Thefirst phase of Fast Forward was substantially completed in the first quarter of2008, and the second phase is underway. 

 

As part of the secondphase of Fast Forward, on December 11, 2008, the Company entered into anagreement with International Business Machines Corporation (“IBM”) pursuant towhich IBM will provide information technology operations and applicationsdevelopment services to the Company. The initial term of the agreement is sevenyears. The agreement commenced on December 11, 2008 and the services werephased in during the first half of 2009. In connection with the agreement, theCompany eliminated approximately 275 positions. As a result of the eliminationof positions and the transition of information technology services to IBM, theCompany incurred charges related to, among other things, employee retention andseverance costs, transition fees paid to IBM and other consulting fees. Almostall charges related to the agreement were cash charges and were expensedthroughout the transition period. Such charges amounted to approximately $3.5million, pre-tax, during 2008 and approximately $9.5 million, pre-tax, duringthe first half of 2009. These charges were recorded as restructuring charges inthe condensed consolidated statement of operations as incurred. The Companyexpects to continue to transition services to IBM during the remainder of 2009and expects charges for the services to amount to approximately $1.0 million,pre-tax. These charges will be recorded as restructuring charges in thecondensed consolidated statement of operations as incurred.

 

In connection with FastForward, the Company incurred costs of approximately $4.5 million ($2.8million after-tax) and $9.8 million ($6.0 million after-tax) for the three andsix months ended June 30, 2009, respectively, which included the costsdescribed above. Such costs included transition fees paid to IBM ofapproximately $3.4 million, employee retention and severance costs ofapproximately $0.7 million and consulting and other costs of approximately $0.4million for the three months ended June 30, 2009. These charges includedtransition fees paid to IBM of approximately $7.2 million, employee retentionand severance costs of approximately $1.6 million and consulting and othercosts of approximately $1.0 million for the six months ended June 30,2009. In the three and six months ended June 30, 2008, the Companyincurred costs of approximately $4.1 million ($2.5 million after-tax) and$6.7 million ($4.0 million after-tax), respectively, in connection with FastForward. The results for the three months ended June 30, 2008 includedconsulting fees of approximately $2.1 million and severance, lease terminationand other costs of approximately $2.0 million. For the six months ended June 30,2008, these charges included consulting fees of approximately $3.7 million andseverance, lease termination and other costs of approximately $3.0 million.

 

For the three and sixmonths ended June 30, 2009, Terminix reversed restructuring costs ofapproximately $0.1 million ($0.0 million after-tax) and recorded restructuringcosts of approximately $3.1 million ($1.9 million after-tax), respectively,relating to a branch optimization project. These costs included a reversal of approximately$0.1 million of lease termination costs for the three months ended June 30,2009, and approximately $2.8 million of lease termination costs andapproximately $0.3 million of severance costs for the six months ended June 30,2009.

 

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The results for the threeand six months ended June 30, 2008 include restructuring charges relatedto the Company’s consolidation of its corporate headquarters into itsoperations support center in Memphis, Tennessee and the closing of itsheadquarters in Downers Grove, Illinois. The transition to Memphis wassubstantially completed in 2007. Almost all costs related to the transitionwere cash expenditures, and were expensed throughout the transition period.During the three and six months ended June 30, 2008, the Company reversednet expenses of $0.1 million ($0.0 million after-tax) and recorded additionalexpenses of approximately $0.6 million ($0.4 million after-tax), respectively,relating to this relocation.

 

The pretax chargesdiscussed above are reported in the “Restructuring charges” line in thecondensed consolidated statements of operations.

 

**Note 4. Commitments and Contingencies**

 

A portion of the Company’svehicle fleet and some equipment are leased through operating leases. The leaseterms are non-cancelable for the first twelve-month term, and then aremonth-to-month, cancelable at the Company’s option. There are residual valueguarantees by the Company (ranging from 70 percent to 84 percent ofthe estimated terminal value at the inception of the lease depending on theagreement) relative to these vehicles and equipment, which historically havenot resulted in significant net payments to the lessors.  The fair value of the assets under all of thefleet and equipment leases is expected to substantially mitigate the Company’sguarantee obligations under the agreements. At June 30, 2009, theCompany’s residual value guarantees related to the leased assets totaled $94million for which the Company has recorded the estimated fair value of theseguarantees of approximately $1.8 million in the condensed consolidatedstatement of financial position.

 

The Company maintainslease facilities with banks totaling $65 million, which provide for thefinancing of branch properties to be leased by the Company. At June 30,2009, approximately $65 million was funded under these facilities.Approximately $12 million of these leases are treated as capital leases andhave been included on the balance sheet as assets with related debt as of June 30,2009. The balance of the funded amount is treated as operating leases. TheCompany has guaranteed the residual value of the properties under the leases upto 73 percent of the fair market value at the commencement of the lease.At June 30, 2009, the Company’s residual value guarantees related to theleased assets totaled $53 million for which the Company has recorded theestimated fair value of these guarantees of approximately $0.1 million inthe condensed consolidated statements of financial position. In connection withthe closing of the Merger, the Company amended these leases effective July 24,2007. Among the modifications, the Company extended the lease terms through July 24,2010. The operating lease and capital lease classifications of these leases didnot change as a result of the modifications.

 

The Company carriesinsurance policies on insurable risks at levels that it believes to be appropriate,including workers’ compensation, auto and general liability risks. The Companypurchases insurance from third-party insurance carriers. These policiestypically incorporate significant deductibles or self-insured retentions. TheCompany is required to pay all claims that fall below the retention limits. Asof June 30, 2009 and December 31, 2008, the Company had accruedself-insured claims of $143 million and $146 million, respectively. During thesix months ended June 30, 2009 and 2008, the Company recorded provisionsfor uninsured claims totaling $18 million and $19 million, respectively, andthe Company paid claims totaling $22 million and $28 million, respectively. Indetermining the Company’s accrual for self-insured claims, the Company useshistorical claims experience to establish both the current year accrual and theunderlying provision for future losses. This actuarially determined provisionand related accrual includes both known claims, as well as incurred but notreported claims. The Company adjusts its estimate of accrued self-insuredclaims when required to reflect changes based on factors such as changes inhealth care costs, accident frequency and claim severity.

 

Accruals for warrantyclaims in the American Home Shield business are made based on the Company’sclaims experience and actuarial projections. Termite damage claim accruals arerecorded based on both the historical rates of claims incurred within acontract year and the cost per claim. Current activity could differ causing achange in estimates. The Company has certain liabilities with respect toexisting or potential claims, lawsuits and other proceedings. The Companyaccrues for these liabilities when it is probable that future costs will beincurred and such costs can be reasonably estimated. Any resulting adjustments,which could be material, are recorded in the period the adjustments areidentified.

 

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In the ordinary course ofconducting its business activities, the Company becomes involved in judicial,administrative and regulatory proceedings involving both private parties andgovernmental authorities. These proceedings include general and commercialliability and employment actions as well as environmental proceedings. TheCompany does not expect any of these proceedings to have a material effect onthe Company’s business, financial condition, annual results of operations orcash flows.

 

**Note 5. Goodwill and IntangibleAssets**

 

Inaccordance with SFAS No. 142, “Goodwill and Other Intangible Assets”,goodwill and intangible assets that are not amortized are subject to assessmentfor impairment by applying a fair-value based test on an annual basis or morefrequently if circumstances indicate a potential impairment. The Company’sannual assessment date is October 1.

 

The table belowsummarizes the goodwill balances by segment for continuing operations:

 
| **(In thousands)**             | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home********Shield** | ** ** | **Other********Operations &  Headquarters** | ** ** | **Total** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------------|------------|------------------------------------------------------|------------|-----------|------------|
| Balance  at Dec. 31, 2008 |       | $                      | 1,161,507  |                   | $          | 45,782       |       | $                                | 1,352,799  |                                                 | $          | 348,309   |       | $ | 185,512 |   | $ | 3,093,909 |   |
| Acquisitions                   |       | 2,090                  |       | —                 |       | 2,519        |       | —                           |       | 1,276                                                |       | 5,885     |       |
| Other(1)                       |       | (364                   | )          | (946                   | )          | (394         | )          | (149                             | )          | (98                                                  | )          | (1,951    | )          |
| Balance  at June 30, 2009 |       | $                      | 1,163,233  |                   | $          | 44,836       |       | $                                | 1,354,924  |                                                 | $          | 348,160   |       | $ | 186,690 |   | $ | 3,097,843 |   |

 

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(1)                                 Reflects the amortization of taxdeductible goodwill.

 

The table belowsummarizes the other intangible asset balances for continuing operations:

 

| ** **              | ** ** | **As of********June 30, 2009** | ** ** | **As of********December 31, 2008** | ** ** |
|-------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| **(In thousands)**      | ** ** | **Gross**                           | ** ** | **Accumulated  Amortization**           | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Trade  names(1)         |       | $                                   | 2,408,100  |                                    | $          | — |   | $ | 2,408,100 |   | $ | 2,408,100 |   | $ | — |   | $ | 2,408,100 |   |
| Customer  relationships |       | 662,753                             |       | (280,804                                | )          | 381,949 |   | 660,677 |   | (209,485 | ) | 451,192 |   |
| Franchise  agreements   |       | 88,000                              |       | (21,344                                 | )          | 66,656 |   | 88,000 |   | (16,270 | ) | 71,730 |   |
| Other                   |       | 49,630                              |       | (16,750                                 | )          | 32,880 |   | 49,395 |   | (12,433 | ) | 36,962 |   |
| Total                   |       | $                                   | 3,208,483  |                                    | $          | (318,898 | ) | $ | 2,889,585 |   | $ | 3,206,172 |   | $ | (238,188 | ) | $ | 2,967,984 |   |
|                         |            |                                     |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                 Not subject to amortization.

 

**Note 6. Stock-Based Compensation**

 

During the three and sixmonths ended June 30, 2009, the Company recognized stock-basedcompensation cost of approximately $2.0 million ($0.9 million after-tax) and$3.9 million ($2.3 million after-tax), respectively. During the three and sixmonths ended June 30, 2008, the Company recognized stock-basedcompensation cost of approximately $1.7 million ($1.0 million after-tax) and$3.4 million ($2.6 million after-tax), respectively. As of June 30, 2009,there was approximately $22.5 million of total unrecognized compensation costrelated to non-vested stock options granted by Holdings under the ServiceMasterGlobal Holdings, Inc. Stock Incentive Plan. These remaining costs areexpected to be recognized over a weighted-average period of 2.7 years.

 

**Note 7.Supplemental Cash Flow Information**

 

In the condensedconsolidated statements of cash flows, the caption “Cash and cash equivalents”includes investments in short-term, highly-liquid securities having a maturityof three months or less when purchased. Supplemental information relating tothe condensed consolidated statements of cash flows for the six months ended June 30,2009 and 2008 is presented in the following table:

 

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| ** **                                                 | ** ** | **Six months ended********June 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------|------------|
| **(In thousands)**                                    | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| Cash paid for or (received from): |       |                                           |       |   |   |
| Interest expense                                           |       | $                                              | 162,652    |   | $ | 158,012 |   |
| Interest and dividend income                               |       | (3,626                                         | )          | (7,342 | ) |
| Income taxes, net of refunds                               |       | 195                                            |       | 5,913 |   |
|                                                            |            |                                                |            |  |  |  |  |

 

**Note 8.Comprehensive Income**

 

Totalcomprehensive income was $41.7 million and $41.7 million for the three and sixmonths ended June 30, 2009, respectively.  Totalcomprehensive income (loss) was $39.0 million and ($51.6) million for the threeand six months ended June 30, 2008, respectively. Total comprehensiveincome (loss) primarily includes net income (loss), unrealized gain (loss) onmarketable securities, unrealized gain (loss) on derivative instruments and theeffect of foreign currency translation.

 

**Note 9. Receivable Sales**

 

The Company hasentered into an accounts receivable securitization arrangement under whichTruGreen LawnCare and Terminix sell certain eligible trade accounts receivableto ServiceMaster Funding Company LLC (“Funding”), the Company’swholly-owned, bankruptcy-remote subsidiary which is consolidated for financialreporting purposes. Funding, in turn, may transfer, on a revolving basis, anundivided percentage ownership interest of up to $50.0 million in the poolof accounts receivable to one or both of the unrelated purchasers who areparties to the accounts receivable securitization arrangement (“Purchasers”).The amount of the eligible receivables varies during the year based onseasonality of the business and could, at times, limit the amount available tothe Company from the sale of these interests.

 

The accounts receivablesecuritization arrangement is a 364-day facility that is renewable annually atthe option of Funding, with a final termination date of July 17, 2012.Only one of the Purchasers is required to purchase interests under thearrangement. If this Purchaser were to exercise its right to terminate itsparticipation in the arrangement, which it may do in the third quarter of eachyear, the amount of cash available to the Company thereunder may be reduced oreliminated. As part of the annual renewal of the facility, which occurred on July 21,2009, this Purchaser agreed to continue its participation in the arrangement atleast through July 2010.

 

During the three and sixmonths ended June 30, 2009 and 2008, there were no transfers of interestsin the pool of accounts receivables to Purchasers under this arrangement. As ofJune 30, 2009, the Company had $10.0 million outstanding under thearrangement and had $40.0 million of remaining capacity available under theaccounts receivable securitization arrangement. As of June 30, 2008 therewere no amounts outstanding under the arrangement.

 

The Company has recordedits obligation to repay the third party for its interest in the pool ofreceivables as long-term debt in these condensed consolidated financialstatements. The interest rates applicable to the Company’s obligation are basedon a fluctuating rate of interest measured based on the third party purchaser’spooled commercial paper rate, as defined (0.34% at June 30, 2009). Inaddition, the Company pays usage fees on its obligations and commitment fees onundrawn amounts committed by the Purchasers. All obligations under the accountsreceivable securitization arrangement must be repaid by July 17, 2012, thefinal termination date of the arrangement.

 

**Note 10. Cash and Marketable Securities**

 

Cash, money market fundsand certificates of deposits, with maturities of three months or less, areincluded in the condensed consolidated statements of financial position caption“Cash and cash equivalents.” As of June 30, 2009 and December 31,2008, the Company’s investments consist primarily of domestic publicly tradeddebt of $88.9 million and $90.1 million, respectively, and commonequity securities of $38.2 million and $43.0 million, respectively.

 

The aggregate marketvalue of the Company’s short-term and long-term investments in debt and equitysecurities was $127.1 million and $133.1 million, and the aggregatecost basis was $124.4 million and $134.9 million at June 30,2009 and December 31, 2008, respectively.

 

Gains and losses on salesof investments, as determined on a specific identification basis, are includedin investment income in the period they are realized. The Company periodicallyreviews its portfolio of investments to determine whether there has been another than temporary decline in the value of the investments from factors suchas deterioration in the

 

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financial condition of the issuer or the market(s) inwhich it competes. The Company recorded an impairment charge of approximately$0.5 million ($0.2 million after-tax) and $5.9 million($3.4 million after-tax) during the three and six months ended June 30,2009, respectively, due to other than temporary declines in the value ofcertain investments. The Company recorded an impairment charge of approximately$3.0 million ($1.8 million after-tax) and $8.2 million($6.2 million after-tax) during the three and six months ended June 30,2008, respectively, due to other than temporary declines in the value ofcertain investments. The unrealized gains in the investment portfolio wereapproximately $5.8 million and $4.2 million as of June 30, 2009and December 31, 2008, respectively. Unrealized losses were approximately$3.1 million and $6.0 million as of June 30, 2009 and December 31,2008, respectively. The portion of unrealized losses which have been in a lossposition for more than one year at June 30, 2009 and December 31,2008 was approximately $0.4 million and $0.4 million, respectively. Theaggregate fair value of the investments with unrealized losses totaled$22.6 million and $26.8 million at June 30, 2009 and December 31,2008, respectively.

 

**Note 11. Long-Term Debt**

 

Long-term debt at June 30,2009 and December 31, 2008 is summarized in the following table:

 
| **(In thousands)**                                 | ** ** | **As of********June 30,********2009** | ** ** | **As of********December 31,  2008** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| Senior  secured term loan facility maturing in 2014     |       | $                                          | 2,597,000  |                                     | $          | 2,610,250 |   |
| 10.75%  /11.50% senior toggle notes maturing in 2015(1) |       | 1,061,000                                  |       | 1,150,000                                |       |
| Revolving  credit facility maturing in 2013             |       | 165,000                                    |       | 165,000                                  |       |
| 7.10%  notes maturing in 2018(2)                        |       | 62,661                                     |       | 61,698                                   |       |
| 7.45%  notes maturing in 2027(2)                        |       | 146,550                                    |       | 145,215                                  |       |
| 7.25%  notes maturing in 2038(2)                        |       | 59,420                                     |       | 59,016                                   |       |
| Other                                                   |       | 65,084                                     |       | 74,913                                   |       |
| Less  current portion                                   |       | (219,105                                   | )          | (221,269                                 | )          |
| Total  long-term debt                                   |       | $                                          | 3,937,610  |                                     | $          | 4,044,823 |   |

 

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| (1)    | During the first  quarter of 2009, the Company completed open market purchases of  $89.0 million in face value of our Permanent Notes for a cost of  $41.0 million. The debt acquired by the Company has been retired, and  the Company has discontinued the payment of interest. The Company recorded a  gain on extinguishment of debt of $46.1 million in its condensed  consolidated statement of operations for the six months ended June 30,  2009 related to these retirements. Included in the gain on extinguishment of  debt are write-offs of unamortized debt issuance costs related to the  extinguished debt of $1.9 million. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    | The increase in the  balance from December 31, 2008 to June 30, 2009 reflects the  amortization of fair value adjustments related to purchase accounting, which  effectively increases the stated coupon interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

**Note 12. Discontinued Operations**

 

Reported “loss fromdiscontinued operations, net of income taxes” for all periods presentedincludes the operating results of the sold and discontinued businesses noted inthe Company’s Annual Report on Form 10-K for the year ended December 31,2008.

 

The operating results andfinancial position of discontinued operations are as follows:

 
| ** **                                              | ** ** | **Three months ended********June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Operating  Results:                                     |       |                                        |       |   |   |
| Operating  revenue                                      |       | $                                           | 56         |   | $ | 21,834 |   |
| Operating  (loss) income                                |       | (177                                        | )          | 1,766 |   |
| Interest  expense                                       |       | —                                      |       | (29 | ) |
| Impairment  charge                                      |       | —                                      |       | (6,317 | ) |
| Loss  from discontinued operations, before income taxes |       | (177                                        | )          | (4,580 | ) |
| Benefit  from income taxes                              |       | (70                                         | )          | (1,844 | ) |
| Loss  from discontinued operations, net of income taxes |       | $                                           | (107       | ) | $ | (2,736 | ) |

 

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| ** **                                              | ** ** | **Six months ended********June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Operating  Results:                                     |       |                                      |       |   |   |
| Operating  revenue                                      |       | $                                         | 56         |   | $ | 39,640 |   |
| Operating  (loss) income                                |       | (441                                      | )          | 629 |   |
| Interest  expense                                       |       | —                                    |       | (70 | ) |
| Impairment  charge                                      |       | —                                    |       | (6,317 | ) |
| Loss  from discontinued operations, before income taxes |       | (441                                      | )          | (5,758 | ) |
| Benefit  for income taxes                               |       | (171                                      | )          | (2,274 | ) |
| Loss  from discontinued operations, net of income taxes |       | $                                         | (270       | ) | $ | (3,484 | ) |

 
| **(In thousands)**     | ** ** | **As of********June 30,********2009** | ** ** | **As of********December 31,  2008** | ** ** |
|------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| Financial  Position:   |       |                                       |       |                                     |       |
| Current  assets        |       | $                                          | 49         |                                     | $          | 412 |   |
| Total  assets          |       | $                                          | 49         |                                     | $          | 412 |   |
| Current  liabilities   |       | $                                          | 2,912      |                                     | $          | 4,870 |   |
| Long-term  liabilities |       | 4,059                                      |       | 4,077                                    |       |
| Total  liabilities     |       | $                                          | 6,971      |                                     | $          | 8,947 |   |

 

The table belowsummarizes the activity for the six months ended June 30, 2009 for theremaining liabilities from operations that were disposed of in years prior to2009. The remaining obligations primarily relate to long-term self-insurance claims.The Company believes that the remaining reserves continue to be adequate andreasonable.

 
| **(In thousands)**                                 | ** ** | **As of********December 31,********2008** | ** ** | **Cash Payments  or Other** | ** ** | **(Income)/  Expense** | ** ** | **As of  June 30,********2009** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------|------------|------------------------|------------|--------------------------------------|------------|
| Remaining  liabilities of discontinued operations: |       |                                           |       |                                  |       |                   |       |                                 |       |
| ARS/AMS                                            |       | $                                              | 2,331      |                                  | $          | —                 |       | $                                    | 299        |   | $ | 2,630 |   |
| LandCare  Construction                             |       | 869                                            |       | (103                                  | )          | (38                    | )          | 728                                  |       |
| LandCare  utility line clearing business           |       | 1,099                                          |       | (107                                  | )          | —                 |       | 992                                  |       |
| Certified  Systems, Inc. and other            |       | 3,558                                          |       | (1,261                                | )          | —                 |       | 2,297                                |       |
| InStar                                             |       | 1,090                                          |       | (766                                  | )          | —                 |       | 324                                  |       |
| Total  liabilities of discontinued operations      |       | $                                              | 8,947      |                                  | $          | (2,237                 | )          | $                                    | 261        |   | $ | 6,971 |   |

 

**Note 13. Income Taxes**

 

At December 31,2008, the Company had $14.2 million of tax benefits primarily reflected instate tax returns that had not been recognized for financial reporting purposes(“unrecognized tax benefits”). During the three and six months ended June 30,2009, unrecognized tax benefits increased by $0.7 million and decreased by $2.8million, respectively.  In addition,accrued estimated tax interest and penalties increased by $0.4 million anddecreased by $0.3 million for the three and six months ended June 30,2009, respectively. The Company currently estimates that, as a result ofpending tax settlements and expiration of statutes of limitations, the amountof unrecognized tax benefits could be reduced by approximately $2.3 millionduring the next 12 months.

 

In the first quarter of2009, the IRS completed the audit of the Company’s tax return for the yearended December 31, 2007 with no adjustments or additional payments.

 

***Note14. Business Segment Reporting***

* *

*Thebusiness of the Company is conducted through five reportablesegments: TruGreen LawnCare, TruGreen LandCare, Terminix, American HomeShield and Other Operations and Headquarters.*

 

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*Inaccordance with SFAS 131, “Disclosures about Segments of an Enterprise andRelated Information”, the Company’s reportable segments are strategic businessunits that offer different services.*TheTruGreen LawnCare segment provides residential and commercial lawn careservices. The TruGreen LandCare segment provides landscaping services primarilyto commercial customers. The Terminix segment provides termite and pest controlservices to residential and commercial customers. The American Home Shieldsegment provides home service contracts to consumers that cover HVAC, plumbingand other home systems and appliances. The Other Operations and Headquarterssegment includes the franchised and Company-owned operations of ServiceMasterClean, AmeriSpec, Furniture Medic and Merry Maids, which provide primarilyresidential disaster restoration, commercial cleaning, carpet and upholsterycleaning, home inspection services, furniture repair and house cleaningservices. The Other Operations and Headquarters segment also includes theCompany’s headquarters operations, which provide various technology, marketing,finance, legal and other support services to the business units.

* *

*Segmentinformation for continuing operations is presented below.*

* *
| ** **                            | ** ** | **Three months ended** | ** **    | **Six months ended** | ** ** |
|---------------------------------------|------------|------------------------|---------------|----------------------|------------|
| ** **                            | ** ** | **June 30,**      | ** **    | **June 30,**    | ** ** |
| **(In thousands)**               | ** ** | **2009**               | ** **    | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Operating  Revenue:                   |       |                   |          |                 |       |   |   |   |   |
| TruGreen  LawnCare                    |       | $                      |  348,403 |                 | $          |  377,296 |   | $ |  483,069 |   | $ |  511,738 |   |
| TruGreen  LandCare                    |       | 69,433                 |          | 83,877               |       | 136,318 |   | 162,529 |   |
| Terminix                              |       | 307,375                |          | 311,774              |       | 570,536 |   | 573,422 |   |
| American  Home Shield                 |       | 179,823                |          | 167,570              |       | 310,691 |   | 272,988 |   |
| Other  Operations and Headquarters    |       | 52,258                 |          | 56,788               |       | 102,605 |   | 108,859 |   |
| Total  Operating Revenue              |       | $                      |  957,292 |                 | $          |  997,305 |   | $ |  1,603,219 |   | $ |  1,629,536 |   |
| Operating  Income (Loss):(1),(2),(3)  |       |                   |          |                 |       |   |   |   |   |
| TruGreen  LawnCare                    |       | $                      |  39,513  |                 | $          |  55,913 |   | $ |  20,126 |   | $ |  21,854 |   |
| TruGreen  LandCare                    |       | (1,479                 | )             | (2,693               | )          | 4,217 |   | (602 | ) |
| Terminix                              |       | 62,172                 |          | 59,682               |       | 108,663 |   | 102,895 |   |
| American  Home Shield                 |       | 26,607                 |          | 9,401                |       | 32,061 |   | (8,291 | ) |
| Other  Operations and Headquarters(2) |       | (8,808                 | )             | (8,124               | )          | (18,384 | ) | (11,979 | ) |
| Total  Operating Income               |       | $                      |  118,005 |                 | $          |  114,179 |   | $ |  146,683 |   | $ |  103,877 |   |

 

----

(1)          Presented below is areconciliation of segment operating income to income (loss) from continuingoperations before income taxes.

 
| ** **                                                    | ** ** | **Three months ended** | ** **    | **Six months ended** | ** ** |
|---------------------------------------------------------------|------------|------------------------|---------------|----------------------|------------|
| ** **                                                    | ** ** | **June 30,**      | ** **    | **June 30,**    | ** ** |
| **(In thousands)**                                       | ** ** | **2009**               | ** **    | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Total  Segment Operating Income                               |       | $                      |  118,005 |                 | $          |  114,179 |   | $ |  146,683 |   | $ |  103,877 |   |
| Non-operating  expense (income):                              |       |                   |          |                 |       |   |   |   |   |
| Interest  expense                                             |       | 74,656                 |          | 83,425               |       | 151,322 |   | 173,011 |   |
| Interest  and net investment (income) loss                    |       | (3,395                 | )             | (4,164               | )          | 1,366 |   | 1,881 |   |
| Gain  on extinguishment of debt                               |       | —                 |          | —               |       | (46,106 | ) | — |   |
| Minority  interest and other expense, net                     |       | 179                    |          | 145                  |       | 379 |   | 277 |   |
| Income  (Loss) from Continuing Operations before Income Taxes |       | $                      |  46,565  |                 | $          |  34,773 |   | $ |  39,722 |   | $ |  (71,292 | ) |

 

(2)          The results includerestructuring charges related to (i) Fast Forward, (ii) a branchoptimization project at Terminix and (iii) the Company’s decision toconsolidate its corporate headquarters into its operations support center inMemphis, Tennessee and close its former headquarters in Downers Grove,Illinois. The restructuring charges totaled $4.4 million and $12.9 million inthe three and six months ended June 30, 2009, respectively, and $4.0million and $7.3 million for the three and six months ended June 30, 2008,respectively. Presented below is a summary of restructuring charges by reportablesegments.

 

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| ** **                         | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(In thousands)**            | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Restructuring  charges             |       |                   |       |                 |       |   |   |   |   |
| TruGreen  LawnCare                 |       | $                      | —     |                 | $          | 35 |   | $ | — |   | $ | 316 |   |
| TruGreen  LandCare                 |       | (21                    | )          | 623                  |       | (51 | ) | 202 |   |
| Terminix                           |       | (69                    | )          | —               |       | 3,151 |   | 57 |   |
| American  Home Shield              |       | 36                     |       | 448                  |       | 75 |   | 448 |   |
| Other  Operations and Headquarters |       | 4,484                  |       | 2,899                |       | 9,738 |   | 6,307 |   |
| Total  Restructuring charges       |       | $                      | 4,430      |                 | $          | 4,005 |   | $ | 12,913 |   | $ | 7,330 |   |

 

(3)   The results include Merger charges related to thepurchase of ServiceMaster by a group of investors led by CD&R. The Mergerrelated charges totaled $1.2 million and $1.4 million for the three andsix months ended June 30, 2009, respectively, and $0.3 million and $0.4million for the three and six months ended June 30, 2008, respectively.All Merger related charges are included in the Other Operations andHeadquarters segment.

 

**Note 15. Related PartyTransactions**

 

In connection with theTransactions, the Company entered into a consulting agreement with CD&Runder which CD&R provides the Company with on-going consulting andmanagement advisory services in exchange for an annual management fee of $2million, which is payable quarterly. The Company recorded a management fee of$0.5 million and $1.0 million for the threeand six months ended June 30, 2009, respectively, and $0.5 million and$1.0 million for the three and six months ended June 30, 2008,respectively. The consulting agreement also provides that CD&R may receiveadditional fees in connection with certain subsequent financing and acquisitionor disposition transactions. The management fee increased in July 2009 as describedin Note 18.

 

The Company wasadvised by Holdings that, during the first quarter of 2009, Holdings completedopen market purchases of $11.0 million in face value of our Permanent Notes fora cost of $4.5 million. Holdings did not complete any additional openmarket purchases of our Permanent Notes in the second quarter of 2009. As of June 30,2009, Holdings has completed open market purchases totaling $65.0 millionin face value of our Permanent Notes for a cost of $21.4 million. As of June 30,2008, Holdings had not completed any open market purchases of our PermanentNotes. The debt acquired by Holdings has not been retired, and the Company hascontinued to pay interest in accordance with the terms of the debt. The Companyrecorded interest expense of $1.7 million and $3.4 million during the three andsix months ended June 30, 2009, respectively.  The Company made cash payments for interestto Holdings of $3.0 million during the first quarter of 2009 and did not makecash payments for interest during the second quarter of 2009. Interest accruedby the Company and payable to Holdings as of June 30, 2009 amounted to$3.2 million.

 

**Note 16.Newly Issued Accounting Statements and Positions**

 

In September 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS 157, “Fair Value Measurement”. ThisStatement defines fair value, establishes a framework for measuring fair valuein accordance with GAAP, and expands disclosures about fair value measurements.SFAS No. 157 does not require any new fair value measurements. In February 2008,the FASB approved FASB Staff Position FAS 157-2, “Effective Date of FASBStatement No. 157” (“FSP 157-2”), that permits companies to partiallydefer the effective date of SFAS No. 157 for one year for non-financialassets and non-financial liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis. FSP 157-2 does notpermit companies to defer recognition and disclosure requirements for financialassets and financial liabilities or for non-financial assets and non-financialliabilities that are re-measured at least annually. SFAS No. 157 thereforeis effective for financial assets and financial liabilities and fornon-financial assets and non-financial liabilities that are re-measured atleast annually for fiscal years beginning after November 15, 2007. It iseffective for non-financial assets and non-financial liabilities that arerecognized or disclosed at fair value in the financial statements on anonrecurring basis for fiscal years beginning after November 15, 2008. In October 2008,the FASB approved FASB Staff Position FAS 157-3, “Determining the Fair Value ofa Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”),which clarified the application of SFAS No. 157 in cases where the marketfor the asset is not active. FSP 157-3 was effective upon issuance. The Companyconsidered the guidance provided by FSP 157-3 in the preparation of theaccompanying condensed consolidated financial statements. The Company hasassessed the impact of this Statement to the Company’s condensed consolidatedfinancial position, results of operations and cash flows. The Company adoptedthis Statement for financial assets and liabilities in 2008 and fornon-financial assets and liabilities in the first quarter of 2009. 

 

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The adoption of this Statement for non-financialassets and liabilities recognized at fair value on a nonrecurring basis did nothave a material effect on these condensed consolidated financial statements. InApril 2009, the FASB issued FASB Staff Position FAS 157-4, “DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly”(“FSP157-4”), which provides additional guidance for estimating fair value inaccordance with SFAS No. 157, when the volume and level of activity forthe asset or liability have significantly decreased and also includes guidanceon identifying circumstances that indicate a transaction is not orderly. FSP157-4 is effective for interim and annual reporting periods ending after June 15,2009. The Company adopted FSP 157-4 during the second quarter of 2009, and itsapplication had no impact on the Company’s condensed consolidated financialstatements.

 

In December 2007, the FASB issued SFAS 141(R), “BusinessCombinations”. This Statement will significantly change the accounting forbusiness combinations and is effective for business combinations finalized infiscal years beginning after December 15, 2008. SFAS No. 141(R) changesthe method for applying the accounting for business combinations in a number ofsignificant respects including the requirement to expense transaction fees andexpected restructuring costs as incurred, rather than including these amountsin the allocated purchase price; the requirement to recognize the fair value ofcontingent consideration at the acquisition date, rather than the expectedamount when the contingency is resolved; the requirement to recognize the fairvalue of acquired in-process research and development assets at the acquisitiondate, rather than immediately expensing; and the requirement to recognize again in relation to a bargain purchase price, rather than reducing theallocated basis of long-lived assets. In addition, SFAS No. 141(R) requiresthat changes in the amount of acquired tax attributes be included in theCompany’s results of operations, rather than adjusting the allocated purchaseprice. SFAS No. 141(R) was effective on January 1, 2009 and isbeing applied prospectively to business combinations that have an acquisitiondate on or after January 1, 2009. While SFAS No. 141(R) appliesonly to business combinations with an acquisition date after its effectivedate, the amendments to SFAS No. 109, “Accounting for Income Taxes,” withrespect to deferred tax asset valuation allowances and liabilities for incometax uncertainties, will be applied to all deferred tax valuation allowances andliabilities for income tax uncertainties recognized in prior businesscombinations. In April 2009, the FASB issued FASB Staff Position FAS141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a BusinessCombination That Arise from Contingencies” (“FSP 141(R)-1”), which amends andclarifies SFAS No. 141(R) to address application on initialrecognition and measurement, subsequent measurement and accounting, anddisclosure of assets and liabilities arising from contingencies in a businesscombination. The provisions of SFAS No. 141(R) and FSP 141 (R)-1 willnot impact the Company’s condensed consolidated financial statements for priorperiods. The Company adopted SFAS No. 141(R) and FSP 141(R)-1 duringthe first quarter of 2009. The adoption of these standards did not have amaterial affect on the Company’s condensed consolidated financial statements.

 

In December 2007,the FASB issued SFAS 160, “Non-controlling Interests in Consolidated FinancialStatements—An Amendment of ARB No. 51”. This Statement establishes newaccounting and reporting standards for the non-controlling interest in asubsidiary and for the deconsolidation of a subsidiary. This Statement iseffective for fiscal years beginning after December 15, 2008, withpresentation and disclosure requirements applied retrospectively to comparativefinancial statements. The Company adopted the provisions of this standard inthe first quarter of 2009. The adoption of this standard did not have amaterial effect on the Company’s condensed consolidated financial statements.

 

In March 2008, the FASB issued SFAS 161, “Disclosuresabout Derivative Instruments and Hedging Activities—an amendment of FASB StatementNo. 133”. This statement requires additional disclosures for derivativeinstruments and hedging activities that include how and why an entity usesderivatives, how these instruments and the related hedged items are accountedfor under SFAS No. 133 and related interpretations, and how derivativeinstruments and related hedged items affect the entity’s financial position,results of operations and cash flows. This statement is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008. The Company adopted this standard in the first quarter of 2009 (See Note17).

 

In April 2008, the FASB approved FASB StaffPosition FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP142-3”). FSP 142-3 amends the factors that should be considered in developingrenewal or extension assumptions used to determine the useful life of arecognized intangible asset under SFAS No. 142, “Goodwill and OtherIntangible Assets.” FSP 142-3 is effective for financial statements issued forfiscal years beginning after November 15, 2008. The Company adopted FSP142-3 in the first quarter of 2009. The adoption of this standard did not havea material effect on the Company’s condensed consolidated financial statements.

 

In April 2009, theFASB issued FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments” (“FSP 115-2”), which changesexisting guidance for determining whether an impairment of debt securities isother than temporary. FSP 115-2 requires other than temporary impairments to beseparated into the amount representing the decrease in cash flows expected tobe collected from a security (referred to as credit losses)

 

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which is recognized inearnings and the amount related to other factors which is recognized in othercomprehensive income. This noncredit loss component of the impairment may onlybe classified in other comprehensive income if the holder of the securityconcludes that it does not intend to sell and it is more likely than not thatit will not be required to sell the security before it recovers its value. Ifthese conditions are not met, the noncredit loss must also be recognized inearnings. When adopting FSP 115-2, an entity is required to record a cumulativeeffect adjustment as of the beginning of the period of adoption to reclassifythe noncredit component of a previously recognized other than temporaryimpairment from retained earnings to accumulated other comprehensive income.FSP 115-2 is effective for interim and annual periods ending after June 15,2009. The Company adopted FSP 115-2 as of April 1, 2009. The adoption ofFSP 115-2 did not have a material impact on the Company’s condensedconsolidated financial statements (See Note 17).

 

In April 2009, theFASB issued FASB Staff Position (“FSP”) 107-1 and Accounting Principles Board (“APB”)Opinion No. 28-1, “Interim Disclosures about Fair Value of FinancialInstruments” (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 amends FASBStatement No. 107, “Disclosures about Fair Values of FinancialInstruments,” to require disclosures about the fair value of financialinstruments in interim financial statements as well as in annual financialstatements. It also amends APB Opinion No. 28, “Interim FinancialReporting,” to require those disclosures in all interim financial statements.The Company adopted FSP 107-1 and APB 28-1 effective April 1, 2009 (SeeNote 17).

 

In May 2009, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 165, “SubsequentEvents,” which establishes general standards of accounting for and disclosureof events that occur after the balance sheet date but before the financialstatements are issued or are available to be issued. SFAS No. 165 providesguidance on the period after the balance sheet date during which management ofa reporting entity should evaluate events or transactions that may occur forpotential recognition or disclosure in the financial statements, thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements and the disclosuresthat an entity should make about events or transactions that occurred after thebalance sheet date. The Company adopted SFAS No. 165 during the secondquarter of 2009, and its application had no impact on the Company’s condensedconsolidated financial statements (See Note 18).

 

In June 2009, theFASB issued SFAS 168, “The FASBAccounting Standards Codificationand theHierarchy of Generally Accepted Accounting Principles—a replacement of FASBStatement No. 162”.The Codification will become the source of authoritative GAAP recognized by theFASB to be applied by nongovernmental entities. Rules and interpretivereleases of the SEC under authority of federal securities laws are also sourcesof authoritative GAAP for SEC registrants. On the effective date of SFAS No. 168,the Codification will supersede all then-existing non-SEC accounting andreporting standards. All other nongrandfathered non-SEC accounting literaturenot included in the Codification will become nonauthoritative. SFAS No. 168 iseffective for financial statements issued for interim and annual periods endingafter September 15, 2009 and is not expected to have a material impact onthe Company’s financial statements.

 

**Note 17.Fair Value of Financial Instruments**

 

The period endcarrying amounts of receivables, accounts payable, and accrued liabilitiesapproximate fair value because of the short maturity of these instruments. Theperiod end carrying amounts of long-term notes receivables approximate fairvalue as the effective interest rates for these instruments are comparable tomarket rates at period end. The period end carrying amounts of current andlong-term marketable securities also approximate fair value, with unrealizedgains and losses reported net-of-tax as a component of accumulatedcomprehensive income (loss), or, for certain unrealized losses, reported ininterest and net investment income in the statements of operations if thedecline in value is other than temporary.  The carrying amount of total debt was $4,157 million and$4,266 million and the estimated fair value was approximately $3,399 millionand $2,166 million at June 30, 2009 and December 31, 2008. The fairvalues of the Company’s financial instruments reflect the amounts that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date (exit price).The fair value estimates presented in this report are based on informationavailable to the Company as of June 30, 2009 and December 31, 2008.

 

 The Company has estimated the fair value of itsfinancial instruments measured at fair value on a recurring basis using themarket and income approaches. For investments in marketable securities,deferred compensation trust assets and 

 

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derivativecontracts, which are carried at their fair values, the Company’s fair valueestimates incorporate quoted market prices, other observable inputs (forexample, interest rates) and unobservable inputs (for example, forwardcommodity prices) at the balance sheet date.

 

 The carrying amount and estimated fair value ofthe Company’s financial instruments that are recorded at fair value for theperiods presented are as follows:

 
| ** **                             | ** ** | ** **                                                 | ** ** | **As of  June 30, 2009** | ** ** | **As of  December 31, 2008**                      | ** ** |
|----------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                             | ** ** | ** **                                                 | ** ** | ** **                         | ** ** | **Estimated Fair Value Measurements**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In thousands)**                | ** ** | **Balance  Sheet Locations**                               | ** ** | **Carrying  Value**                | ** ** | **Quoted  Prices In  Active  Markets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** |
| Financial  Assets:                     |       |                                                       |       |                               |       |                                                        |       |   |   |   |   |   |   |   |   |
| Deferred  compensation trust assets    |       | Long-term marketable  securities                           |       | $                                  | 8,495      |                                                        | $          | 8,495 |   | $ | — |   | $ | — |   | $ | 9,901 |   | $ | 9,901 |   |
| Investments  in marketable securities: |       | Marketable securities  and Long-term marketable securities |       | 118,599                            |       | 45,639                                                      |       | 72,960 |   |   |   | 123,161 |   | 123,161 |   |
| Fuel  swap contracts:                  |       |                                                       |       |                               |       |                                                        |       |   |   |   |   |   |   |   |   |
| Current                                |       | Prepaid expenses and  other assets                         |       | 3,730                              |       | —                                                      |       | — |   | 3,730 |   | — |   | — |   |
| Noncurrent                             |       | Other assets                                               |       | 3,276                              |       | —                                                      |       | — |   | 3,276 |   | — |   | — |   |
| Total  financial assets                |       |                                                       |       | $                                  | 134,100    |                                                        | $          | 54,134 |   | $ | 72,960 |   | $ | 7,006 |   | $ | 133,062 |   | $ | 133,062 |   |
|                                   |       |                                                       |       |                               |       |                                                        |       |   |   |   |   |   |   |   |   |
| Financial  Liabilities:                |       |                                                       |       |                               |       |                                                        |       |   |   |   |   |   |   |   |   |
| Fuel  swap contracts                   |       |                                                       |       |                               |       |                                                        |       |   |   |   |   |   |   |   |   |
| Current                                |       | Other accrued  liabilities                                 |       | $                                  | 11,214     |                                                        | $          | — |   | $ | — |   | $ | 11,214 |   | $ | 23,607 |   | $ | 23,607 |   |
| Noncurrent                             |       | Other Long-term  obligations                               |       | 559                                |       | —                                                      |       | — |   | 559 |   | 1,317 |   | 1,317 |   |
| Interest  rate swap contracts          |       | Other Long-term  obligations                               |       | 57,299                             |       | —                                                      |       | 57,299 |   | — |   | 59,852 |   | 59,852 |   |
| Total  financial liabilities           |       |                                                       |       | $                                  | 69,072     |                                                        | $          | — |   | $ | 57,299 |   | $ | 11,773 |   | $ | 84,776 |   | $ | 84,776 |   |

 

A reconciliation of thebeginning and ending fair values of financial instruments valued usingsignificant unobservable inputs (Level 3) for the six months ended June 30,2009 and June 30, 2008, respectively, is presented as follows:

 
| **(In thousands)**                         | ** ** | **Fuel Swap Contract********Assets (Liabilities)** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|
| Balance  at December 31, 2008              |       | $                                                  | (24,924    | ) |
| Total  gains (losses) (realized and unrealized) |       |                                               |       |
| Included  in earnings(1)                        |       | (14,781                                            | )          |
| Included  in other comprehensive income         |       | 20,157                                             |       |
| Settlements,  net                               |       | 14,781                                             |       |
| Balance  at June 30, 2009                  |       | $                                                  | (4,767     | ) |

 
| **(In thousands)**                         | ** ** | **Fuel Swap Contract********Assets (Liabilities)** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|
| Balance  at December 31, 2007              |       | $                                                  | —     |   |
| Total  gains (losses) (realized and unrealized) |       |                                               |       |
| Included  in earnings(1)                        |       | 3,913                                              |       |
| Included  in other comprehensive income         |       | 10,871                                             |       |
| Settlements,  net                               |       | (3,913                                             | )          |
| Balance  at June 30, 2008                  |       | $                                                  | 10,871     |   |

 

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(1)                                Gains included in earnings are reportedin cost of services rendered and products sold.

 

The Company usesderivative financial instruments to manage risks associated with changes infuel prices and interest rates. The Company does not hold or issue derivativefinancial instruments for trading or speculative purposes. In designating itsderivative financial instruments as hedging instruments under Statement ofFinancial Accounting Standards (SFAS) No. 133, *Accounting for Derivative Instruments*, the Company formallydocuments the relationship between the hedging instrument and the hedged item,as well as the risk management objective and strategy for the use of thehedging instrument. This documentation includes linking the derivatives toforecasted transactions. The Company assesses at the time a derivative contractis entered into, and at least quarterly thereafter, whether the derivative itemis effective in offsetting the projected changes in cash flows of the associatedforecasted transactions. All of the Company’s designated hedging instrumentsare classified as cash flow hedges.

 

The Company hashistorically hedged a significant portion of its annual fuel consumption ofapproximately 28 million gallons. The Company has also hedged the interestpayments on a portion of its variable rate debt through the use of interestrate swap agreements. In accordance with SFAS No. 133, all of theCompany’s fuel hedges and interest rate swap agreements are classified as cash flowhedges, and, as such, the hedging instruments are recorded on the balance sheetas either an asset or liability at fair value, with the effective portion ofchanges in the fair value attributable to the hedged risks recorded in othercomprehensive income. Any change in the fair value of the hedging instrumentresulting from ineffectiveness, as defined by SFAS No. 133 is recognizedin current period earnings. Cash flows related to fuel and interest ratederivatives are classified as operating activities in the condensedconsolidated statements of cash flows.

 

The effect of derivativeinstruments on the condensed consolidated statement of operations and othercomprehensive income for the six months ended June 30, 2009 and June 30,2008, respectively, is presented as follows:

 
| **Derivatives  in SFAS No. 133  Cash Flow Hedge** | ** ** | **Effective Portion of   Gain (Loss) Recognized in  Accumulated Other  Comprehensive Loss**  | ** ** | **Effective Portion of Gain (Loss)  Reclassified from   Accumulated Other  Comprehensive Income  (AOCI) into Income** | ** ** | **Location of Gain (Loss)**  | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **Relationships**                                      | ** ** | **Six months ended June 30, 2009**                                                      | ** ** | **included in Income**                                                                                                | ** ** |
|                                                   |       |                                                                                         |       |                                                                                                                  |       |                         |       |
| Fuel  swap contracts                                   |       | $                                                                                            | 20,157     |                                                                                                                  | $          | (14,781                      | )          | Cost of services  rendered and products sold |   |
| Interest  rate swap contracts                          |       | $                                                                                            | 2,553      |                                                                                                                  | $          | (23,389                      | )          | Interest Expense |   |
| ** **                                             | ** ** | ** **                                                                                   | ** ** | ** **                                                                                                            | ** ** | ** **                   |       |
| **Derivatives in SFAS  No. 133  Cash Flow Hedge** | ** ** | **Effective  Portion of   Gain (Loss) Recognized in  Accumulated Other  Comprehensive Loss** | ** ** | **Effective  Portion of Gain (Loss)  Reclassified from AOCI  into Income**                                            | ** ** | **Location  of Gain (Loss)** |       |
| **Relationships**                                      |       | **Six  months ended June 30, 2008**                                                     |       | **included  in Income**                                                                                               |       |
|                                                   |       |                                                                                         |       |                                                                                                                  |       |                         |       |
| Fuel  swap contracts                                   |       | $                                                                                            | 10,871     |                                                                                                                  | $          | 3,913                        |       | Cost of services  rendered and products sold |   |
| Interest  rate swap contracts                          |       | $                                                                                            | 6,739      |                                                                                                                  | $          | (5,561                       | )          | Interest Expense |   |
|                                                        |            |                                                                                              |            |                                                                                                                       |            |                              |            |  |  |  |

 

Ineffective portions ofderivative instruments designated in SFAS No. 133 cash flow hedgerelationships were insignificant during three and six months ended June 30,2009. As of June 30, 2009, the Company had fuel swap contracts to payfixed prices for fuel with an aggregate notional amount of $96.8 million,maturing through 2010. Under the terms of its fuel swap contracts, theCompany is required to post collateral in the event that the fair value of thecontracts exceeds a certain agreed upon liability level. As of June 30, 2009, the Company postedapproximately $10.0 million in letters of credit as collateral for thesecontracts, $5.0 million of which were posted under the Company’s RevolvingCredit Facility. Asof June 30, 2009, the Company had interest rate swap contracts to pay fixedrates for interest on long-term debt with an aggregate notional amount of$1.430 billion, maturing through 2012.

 

Theeffective portion of the gain or loss on derivative instruments designated andqualifying as cash flow hedging instruments is recorded in other comprehensiveincome. These amounts are reclassified into earnings in the same period orperiods during which the hedged forecasted debt interest settlement or the fuelsettlement affects earnings. The amount expected to be reclassified into earningsduring the next twelve months includes unrealized gains and losses related toopen fuel hedges and interest rate swaps. Specifically, as the underlyingforecasted transactions occur during the next 12 months, the hedging gains andlosses in accumulated other comprehensive income expected to be recognized inearnings is a gain of $30.3 million, after-tax, at June 30, 2009. Theamounts that are ultimately reclassified into earnings will be based on actualinterest rates and fuel prices at the time the positions are settled and maydiffer materially from the amount noted above.

 

**Note 18.Subsequent Events**

 

On July 20,2009, the Company repaid $125.0 million of debt outstanding under theRevolving Credit Facility.

 

On July 30,2009, the annual management fee payable under the consulting agreement withCD&R was increased from $2.0 million to $6.25 million in order to align ourfee structure with current market rates. The full year management fee willapply in 2009, and the fees relating to the first three quarters of 2009 willbe paid to CD&R in the third quarter of 2009.

 

InAugust 2009, the boards of directors of the Company and Holdings approvedconsulting agreements with Citigroup Alternative Investments LLC (“Citigroup”),BAS Capital Funding Corporation (“BAS”) and JPMorgan Chase (formerly known asJ.P. Morgan Ventures Corporation, “JPMorgan”), each of which is an EquitySponsor or an affiliate of an Equity Sponsor. Under the consulting agreements,Citigroup, BAS and JPMorgan each will provide the Company with on-goingconsulting and management advisory services until June 30, 2016 or the earliertermination of the existing consulting agreement between the Company andCD&R. The Company will pay annual management fees of $0.5 million, $0.5million and $0.25 million, respectively, to Citigroup, BAS and JPMorgan. Thefull year management fees will apply in 2009, and the fees relating to thefirst three quarters of 2009 will be paid to Citigroup, BAS and J.P. Morgan inthe third quarter of 2009. A form of the consulting agreements is attached asExhibit 10.1 and is incorporated herein by reference. The definitive agreementswith Citigroup, BAS and JPMorgan are in the process of being executed.

 

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TheCompany evaluated subsequent events through the date the accompanying financialstatements were issued, which was August 14, 2009.

 

**Note 19.Condensed Consolidating Financial Statements of The ServiceMaster Company andSubsidiaries**

 

Thefollowing condensed consolidating financial statements of the Company and itssubsidiaries have been prepared pursuant to Rule 3-10 of Regulation S-X.These condensed consolidating financial statements have been prepared from theCompany’s financial information on the same basis of accounting as thecondensed consolidated financial statements. Goodwill and other intangibleassets have been allocated to all of the subsidiaries of the Company based onmanagement’s estimates.

 

On July 24,2008, outstanding amounts under the Interim Loan Facility converted into thePermanent Notes. The payment obligations of the Company under the PermanentNotes are jointly and severally guaranteed on a senior unsecured basis bycertain of the Company’s domestic subsidiaries excluding certain subsidiariessubject to regulatory requirements in various states (“Guarantors”). Each ofthe Guarantors is wholly-owned, directly or indirectly, by the Company, and allguarantees are full and unconditional. All other subsidiaries of the Company,either directly or indirectly owned, do not guarantee the Permanent Notes (“Non-Guarantors”).

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**Forthe Three Months Ended June 30, 2009**

**(inthousands)**

 
| ** **                                                        | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                             |       | $                 | —     |           | $          | 758,031        |       | $                | 218,407    |             | $          | (19,146 | ) | $ | 957,292 |   |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost  of services rendered and products sold                      |       | —            |       | 472,335        |       | 100,184        |       | (19,146          | )          | 553,373          |       |
| Selling  and administrative expenses                              |       | 1,009             |       | 161,166        |       | 77,754         |       | —           |       | 239,929          |       |
| Amortization  expense                                             |       | 55                |       | 31,353         |       | 8,993          |       | —           |       | 40,401           |       |
| Merger  related charges                                           |       | 1,154             |       | —         |       | —         |       | —           |       | 1,154            |       |
| Restructuring  charges                                            |       | —            |       | (90            | )          | 4,520          |       | —           |       | 4,430            |       |
| Total  operating costs and expenses                               |       | 2,218             |       | 664,764        |       | 191,451        |       | (19,146          | )          | 839,287          |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                       |       | (2,218            | )          | 93,267         |       | 26,956         |       | —           |       | 118,005          |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest  expense (income)                                        |       | 84,241            |       | (6,682         | )          | (2,903         | )          | —           |       | 74,656           |       |
| Interest  and net investment (income) loss                        |       | (321              | )          | 2,357          |       | (5,431         | )          | —           |       | (3,395           | )          |
| Other  expense                                                    |       | —            |       | —         |       | 179            |       | —           |       | 179              |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations before Income  Taxes** |       | (86,138           | )          | 97,592         |       | 35,111         |       | —           |       | 46,565           |       |
| (Benefit)  provision for income taxes                             |       | (33,862           | )          | 9,638          |       | 48,397         |       | —           |       | 24,173           |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                      |       | (52,276           | )          | 87,954         |       | (13,286        | )          | —           |       | 22,392           |       |
| Loss  from discontinued operations, net of income taxes           |       | —            |       | —         |       | (107           | )          | —           |       | (107             | )          |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| Equity  in earnings of subsidiaries (net of tax)                  |       | 74,561            |       | (17,283        | )          | —         |       | (57,278          | )          | —           |       |
| **Net Income**                                                    |       | $                 | 22,285     |           | $          | 70,671         |       | $                | (13,393    | )                | $          | (57,278 | ) | $ | 22,285 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**Forthe Three Months Ended June 30, 2008**

**(inthousands)**

 
| ** **                                                        | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                             |       | $                 | —     |           | $          | 805,144        |       | $                | 211,100    |             | $          | (18,939 | ) | $ | 997,305 |   |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost  of services rendered and products sold                      |       | —            |       | 509,020        |       | 99,653         |       | (18,939          | )          | 589,734          |       |
| Selling  and administrative expenses                              |       | 1,551             |       | 160,297        |       | 85,266         |       | —           |       | 247,114          |       |
| Amortization  expense                                             |       | 56                |       | 30,584         |       | 11,328         |       | —           |       | 41,968           |       |
| Merger  related charges                                           |       | 305               |       | —         |       | —         |       | —           |       | 305              |       |
| Restructuring  charges                                            |       | —            |       | 1,308          |       | 2,697          |       | —           |       | 4,005            |       |
| Total  operating costs and expenses                               |       | 1,912             |       | 701,209        |       | 198,944        |       | (18,939          | )          | 883,126          |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                       |       | (1,912            | )          | 103,935        |       | 12,156         |       | —           |       | 114,179          |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest  expense (income)                                        |       | 83,166            |       | 1,513          |       | (1,254         | )          | —           |       | 83,425           |       |
| Interest  and net investment loss (income)                        |       | 564               |       | 648            |       | (5,376         | )          | —           |       | (4,164           | )          |
| Other  expense                                                    |       | —            |       | —         |       | 145            |       | —           |       | 145              |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations before Income  Taxes** |       | (85,642           | )          | 101,774        |       | 18,641         |       | —           |       | 34,773           |       |
| (Benefit)  provision for income taxes                             |       | (23,638           | )          | 28,046         |       | 9,539          |       | —           |       | 13,947           |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                      |       | (62,004           | )          | 73,728         |       | 9,102          |       | —           |       | 20,826           |       |
| Loss  from discontinued operations, net of income taxes           |       | —            |       | —         |       | (2,736         | )          | —           |       | (2,736           | )          |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| Equity  in earnings of subsidiaries (net of tax)                  |       | 80,094            |       | 2,801          |       | —         |       | (82,895          | )          | —           |       |
| **Net Income**                                                    |       | $                 | 18,090     |           | $          | 76,529         |       | $                | 6,366      |             | $          | (82,895 | ) | $ | 18,090 |   |

 

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** **

**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**Forthe Six Months Ended June 30, 2009**

**(inthousands)**

 
| ** **                                                        | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                             |       | $                 | —     |           | $          | 1,264,967      |       | $                | 374,691    |             | $          | (36,439 | ) | $ | 1,603,219 |   |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost  of services rendered and products sold                      |       | —            |       | 815,109        |       | 169,103        |       | (36,439          | )          | 947,773          |       |
| Selling  and administrative expenses                              |       | 2,007             |       | 260,323        |       | 151,362        |       | —           |       | 413,692          |       |
| Amortization  expense                                             |       | 110               |       | 62,601         |       | 17,999         |       | —           |       | 80,710           |       |
| Merger  related charges                                           |       | 1,448             |       | —         |       | —         |       | —           |       | 1,448            |       |
| Restructuring  charges                                            |       | —            |       | 3,100          |       | 9,813          |       | —           |       | 12,913           |       |
| Total  operating costs and expenses                               |       | 3,565             |       | 1,141,133      |       | 348,277        |       | (36,439          | )          | 1,456,536        |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                       |       | (3,565            | )          | 123,834        |       | 26,414         |       | —           |       | 146,683          |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest  expense (income)                                        |       | 161,100           |       | (3,481         | )          | (6,297         | )          | —           |       | 151,322          |       |
| Interest  and net investment loss (income)                        |       | 1,163             |       | 4,432          |       | (4,229         | )          | —           |       | 1,366            |       |
| Gain  on extinguishment of debt                                   |       | (46,106           | )          | —         |       | —         |       | —           |       | (46,106          | )          |
| Other  expense                                                    |       | —            |       | —         |       | 379            |       | —           |       | 379              |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations before Income  Taxes** |       | (119,722          | )          | 122,883        |       | 36,561         |       | —           |       | 39,722           |       |
| (Benefit)  provision for income taxes                             |       | (57,068           | )          | 24,647         |       | 49,039         |       | —           |       | 16,618           |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                      |       | (62,654           | )          | 98,236         |       | (12,478        | )          | —           |       | 23,104           |       |
| Loss  from discontinued operations, net of income taxes           |       | —            |       | —         |       | (270           | )          | —           |       | (270             | )          |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| Equity  in earnings of subsidiaries (net of tax)                  |       | 85,488            |       | (15,884        | )          | —         |       | (69,604          | )          | —           |       |
| **Net Income**                                                    |       | $                 | 22,834     |           | $          | 82,352         |       | $                | (12,748    | )                | $          | (69,604 | ) | $ | 22,834 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**Forthe Six Months Ended June 30, 2008**

**(inthousands)**

 
| ** **                                                        | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                             |       | $                 | —     |           | $          | 1,322,192      |       | $                | 342,706    |             | $          | (35,362 | ) | $ | 1,629,536 |   |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost  of services rendered and products sold                      |       | —            |       | 876,752        |       | 165,712        |       | (35,362          | )          | 1,007,102        |       |
| Selling  and administrative expenses                              |       | 3,259             |       | 261,726        |       | 153,245        |       | —           |       | 418,230          |       |
| Amortization  expense                                             |       | 111               |       | 69,656         |       | 22,875         |       | —           |       | 92,642           |       |
| Merger  related charges                                           |       | 355               |       | —         |       | —         |       | —           |       | 355              |       |
| Restructuring  charges                                            |       | —            |       | 1,394          |       | 5,936          |       | —           |       | 7,330            |       |
| Total  operating costs and expenses                               |       | 3,725             |       | 1,209,528      |       | 347,768        |       | (35,362          | )          | 1,525,659        |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                       |       | (3,725            | )          | 112,664        |       | (5,062         | )          | —           |       | 103,877          |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest  expense (income)                                        |       | 170,874           |       | 3,781          |       | (1,644         | )          | —           |       | 173,011          |       |
| Interest  and net investment loss (income)                        |       | 3,449             |       | 1,296          |       | (2,864         | )          | —           |       | 1,881            |       |
| Other  expense                                                    |       | —            |       | —         |       | 277            |       | —           |       | 277              |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations before Income  Taxes** |       | (178,048          | )          | 107,587        |       | (831           | )          | —           |       | (71,292          | )          |
| (Benefit)  provision for income taxes                             |       | (51,513           | )          | 22,504         |       | 11,985         |       | —           |       | (17,024          | )          |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                      |       | (126,535          | )          | 85,083         |       | (12,816        | )          | —           |       | (54,268          | )          |
| Loss  from discontinued operations, net of income taxes           |       | —            |       | —         |       | (3,484         | )          | —           |       | (3,484           | )          |
| Equity  in earnings (losses) of subsidiaries (net of tax)         |       | 68,783            |       | (18,615        | )          | —         |       | (50,168          | )          | —           |       |
| **Net (Loss) Income**                                             |       | $                 | (57,752    | )              | $          | 66,468         |       | $                | (16,300    | )                | $          | (50,168 | ) | $ | (57,752 | ) |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Financial Position**

**Asof June 30, 2009**

**(inthousands)**

 
| ** **                                                                   | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                   | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Current Assets:**                                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash  and cash equivalents                                                   |       | $                 | 217,207    |           | $          | 18,390         |       | $                | 132,563    |             | $          | — |   | $ | 368,160 |   |
| Marketable  securities                                                       |       | —            |       | —         |       | 24,309         |       | —           |       | 24,309           |       |
| Receivables                                                                  |       | 1,151             |       | 173,234        |       | 413,923        |       | (198,380         | )          | 389,928          |       |
| Inventories                                                                  |       | —            |       | 78,194         |       | 2,966          |       | —           |       | 81,160           |       |
| Prepaid  expenses and other assets                                           |       | 5,885             |       | 49,839         |       | 17,372         |       | —           |       | 73,096           |       |
| Deferred  customer acquisition costs                                         |       | —            |       | 33,540         |       | 20,987         |       | —           |       | 54,527           |       |
| Deferred  taxes                                                              |       | 2,994             |       | 28,666         |       | 1,245          |       |             |       | 32,905           |       |
| Assets  of discontinued operations                                           |       | —            |       | —         |       | 49             |       | —           |       | 49               |       |
| Total  Current Assets                                                        |       | 227,237           |       | 381,863        |       | 613,414        |       | (198,380         | )          | 1,024,134        |       |
| **Property and Equipment:**                                                  |       |              |       |           |       |           |       |             |       |             |       |
| At  cost                                                                     |       | —            |       | 246,267        |       | 79,750         |       | —           |       | 326,017          |       |
| Less:  accumulated depreciation                                              |       | —            |       | (73,386        | )          | (30,186        | )          | —           |       | (103,572         | )          |
| Net  property and equipment                                                  |       | —            |       | 172,881        |       | 49,564         |       | —           |       | 222,445          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Assets:**                                                            |       |              |       |           |       |           |       |             |       |             |       |
| Goodwill                                                                     |       | —            |       | 2,735,244      |       | 362,599        |       | —           |       | 3,097,843        |       |
| Intangible  assets, primarily trade names, service marks and trademarks, net |       | —            |       | 2,072,511      |       | 817,074        |       | —           |       | 2,889,585        |       |
| Notes  receivable                                                            |       | 325,844           |       | 781            |       | 23,632         |       | (325,845         | )          | 24,412           |       |
| Long-term  marketable securities                                             |       | 8,495             |       | —         |       | 94,290         |       | —           |       | 102,785          |       |
| Investments  in and advances to subsidiaries                                 |       | 5,584,461         |       | 1,676,992      |       | 62,163         |       | (7,323,616       | )          | —           |       |
| Other  assets                                                                |       | 92,798            |       | 739            |       | 5,536          |       | (62,715          | )          | 36,358           |       |
| Debt  issuance costs                                                         |       | 74,057            |       | —         |       | —         |       | —           |       | 74,057           |       |
| Total  Assets                                                                |       | $                 | 6,312,892  |           | $          | 7,041,011      |       | $                | 2,028,272  |             | $          | (7,910,556 | ) | $ | 7,471,619 |   |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Liabilities and Shareholder’s Equity**                                |       |              |       |           |       |           |       |             |       |             |       |
| **Current Liabilities:**                                                     |       |              |       |           |       |           |       |             |       |             |       |
| Accounts  payable                                                            |       | $                 | 537        |           | $          | 74,723         |       | $                | 41,182     |             | $          | — |   | $ | 116,442 |   |
| Accrued  liabilities:                                                        |       |              |       |           |       |           |       |             |       |             |       |
| Payroll  and related expenses                                                |       | 2,028             |       | 39,786         |       | 34,455         |       | —           |       | 76,269           |       |
| Self-insured  claims and related expenses                                    |       | —            |       | 22,166         |       | 72,321         |       | —           |       | 94,487           |       |
| Other                                                                        |       | 58,808            |       | 40,973         |       | 66,012         |       | —           |       | 165,793          |       |
| Deferred  revenue                                                            |       | —            |       | 194,965        |       | 294,791        |       | —           |       | 489,756          |       |
| Liabilities  of discontinued operations                                      |       | —            |       | —         |       | 2,912          |       | —           |       | 2,912            |       |
| Current  portion of long-term debt                                           |       | 286,565           |       | 16,971         |       | 113,949        |       | (198,380         | )          | 219,105          |       |
| Total  Current Liabilities                                                   |       | 347,938           |       | 389,584        |       | 625,622        |       | (198,380         | )          | 1,164,764        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term Debt**                                                           |       | 3,900,496         |       | 340,587        |       | 22,372         |       | (325,845         | )          | 3,937,610        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Long-Term Liabilities:**                                             |       |              |       |           |       |           |       |             |       |             |       |
| Deferred  taxes                                                              |       | —            |       | 771,640        |       | 282,292        |       | (62,715          | )          | 991,217          |       |
| Intercompany  payable                                                        |       | 806,421           |       | —         |       | —         |       | (806,421         | )          | —           |       |
| Liabilities  of discontinued operations                                      |       | —            |       | —         |       | 4,059          |       | —           |       | 4,059            |       |
| Other  long-term obligations, primarily self-insured claims                  |       | 80,038            |       | 2,796          |       | 113,136        |       | —           |       | 195,970          |       |
| Total  Other Long-Term Liabilities                                           |       | 886,459           |       | 774,436        |       | 399,487        |       | (869,136         | )          | 1,191,246        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s Equity**                                                |       | 1,177,999         |       | 5,536,404      |       | 980,791        |       | (6,517,195       | )          | 1,177,999        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total Liabilities and Shareholder’s Equity**                          |       | $                 | 6,312,892  |           | $          | 7,041,011      |       | $                | 2,028,272  |             | $          | (7,910,556 | ) | $ | 7,471,619 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Financial Position**

**Asof December 31, 2008**

**(inthousands)**

 
| ** **                                                                   | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                   | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Current Assets:**                                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash  and cash equivalents                                                   |       | $                 | 300,362    |           | $          | 12,105         |       | $                | 93,120     |             | $          | — |   | $ | 405,587 |   |
| Marketable  securities                                                       |       | —            |       | —         |       | 22,928         |       | —           |       | 22,928           |       |
| Receivables                                                                  |       | 1,100             |       | 138,623        |       | 387,271        |       | (191,067         | )          | 335,927          |       |
| Inventories                                                                  |       | —            |       | 77,740         |       | 2,278          |       | —           |       | 80,018           |       |
| Prepaid  expenses and other assets                                           |       | 11,130            |       | 16,687         |       | 9,831          |       | —           |       | 37,648           |       |
| Deferred  customer acquisition costs                                         |       | —            |       | 14,576         |       | 21,938         |       | —           |       | 36,514           |       |
| Deferred  taxes                                                              |       | 10,249            |       | 27,755         |       | 4,941          |       | —           |       | 42,945           |       |
| Assets  of discontinued operations                                           |       | —            |       | —         |       | 412            |       | —           |       | 412              |       |
| Total  Current Assets                                                        |       | 322,841           |       | 287,486        |       | 542,719        |       | (191,067         | )          | 961,979          |       |
| **Property and Equipment:**                                                  |       |              |       |           |       |           |       |             |       |             |       |
| At  cost                                                                     |       | —            |       | 213,036        |       | 74,782         |       | —           |       | 287,818          |       |
| Less:  accumulated depreciation                                              |       | —            |       | (50,917        | )          | (21,272        | )          | —           |       | (72,189          | )          |
| Net  property and equipment                                                  |       | —            |       | 162,119        |       | 53,510         |       | —           |       | 215,629          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Assets:**                                                            |       |              |       |           |       |           |       |             |       |             |       |
| Goodwill                                                                     |       | —            |       | 2,732,432      |       | 361,477        |       | —           |       | 3,093,909        |       |
| Intangible  assets, primarily trade names, service marks and trademarks, net |       | —            |       | 2,133,376      |       | 834,608        |       | —           |       | 2,967,984        |       |
| Notes  receivable                                                            |       | 323,688           |       | 778            |       | 24,850         |       | (323,688         | )          | 25,628           |       |
| Long-term  marketable securities                                             |       | 9,901             |       | —         |       | 100,233        |       | —           |       | 110,134          |       |
| Investments  in and advances to subsidiaries                                 |       | 5,515,710         |       | 1,579,274      |       | 138,363        |       | (7,233,347       | )          | —           |       |
| Other  assets                                                                |       | 93,283            |       | 933            |       | 7,494          |       | (66,360          | )          | 35,350           |       |
| Debt  issuance costs                                                         |       | 83,014            |       | —         |       | —         |       | —           |       | 83,014           |       |
| Total  Assets                                                                |       | $                 | 6,348,437  |           | $          | 6,896,398      |       | $                | 2,063,254  |             | $          | (7,814,462 | ) | $ | 7,493,627 |   |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Liabilities and Shareholder’s Equity**                                |       |              |       |           |       |           |       |             |       |             |       |
| **Current Liabilities:**                                                     |       |              |       |           |       |           |       |             |       |             |       |
| Accounts  payable                                                            |       | $                 | 370        |           | $          | 44,096         |       | $                | 44,776     |             | $          | — |   | $ | 89,242 |   |
| Accrued  liabilities:                                                        |       |              |       |           |       |           |       |             |       |             |       |
| Payroll  and related expenses                                                |       | 1,888             |       | 34,515         |       | 46,633         |       | —           |       | 83,036           |       |
| Self-insured  claims and related expenses                                    |       | —            |       | 21,257         |       | 70,666         |       | —           |       | 91,923           |       |
| Other                                                                        |       | 95,582            |       | 38,259         |       | 68,333         |       | —           |       | 202,174          |       |
| Deferred  revenue                                                            |       | —            |       | 147,421        |       | 296,005        |       | —           |       | 443,426          |       |
| Liabilities  of discontinued operations                                      |       | —            |       | —         |       | 4,870          |       | —           |       | 4,870            |       |
| Current  portion of long-term debt                                           |       | 285,365           |       | 17,538         |       | 109,433        |       | (191,067         | )          | 221,269          |       |
| Total  Current Liabilities                                                   |       | 383,205           |       | 303,086        |       | 640,716        |       | (191,067         | )          | 1,135,940        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term Debt**                                                           |       | 4,000,424         |       | 347,301        |       | 20,786         |       | (323,688         | )          | 4,044,823        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Long-Term Liabilities:**                                             |       |              |       |           |       |           |       |             |       |             |       |
| Deferred  taxes                                                              |       | —            |       | 769,146        |       | 278,960        |       | (66,360          | )          | 981,746          |       |
| Intercompany  payable                                                        |       | 749,800           |       | —         |       | —         |       | (749,800         | )          | —           |       |
| Liabilities  of discontinued operations                                      |       | —            |       | —         |       | 4,077          |       | —           |       | 4,077            |       |
| Other  long-term obligations, primarily self-insured claims                  |       | 82,649            |       | 3,381          |       | 108,652        |       | —           |       | 194,682          |       |
| Total  Other Long-Term Liabilities                                           |       | 832,449           |       | 772,527        |       | 391,689        |       | (816,160         | )          | 1,180,505        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s Equity**                                                |       | 1,132,359         |       | 5,473,484      |       | 1,010,063      |       | (6,483,547       | )          | 1,132,359        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total Liabilities and Shareholder’s Equity**                          |       | $                 | 6,348,437  |           | $          | 6,896,398      |       | $                | 2,063,254  |             | $          | (7,814,462 | ) | $ | 7,493,627 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Cash Flows**

**Forthe Six Months Ended June 30, 2009**

**(inthousands)**

 
| ** **                                                                             | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash and Cash Equivalents at Beginning of Period**                                   |       | $                 | 300,362    |           | $          | 12,105         |       | $                | 93,120     |             | $          | — |   | $ | 405,587 |   |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Net Cash (Used for) Provided from Operating Activities from  Continuing Operations** |       | (82,702           | )          | 208,214        |       | (10,649        | )          | (43,634          | )          | 71,229           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Investing Activities from Continuing  Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Property  additions                                                                    |       | —            |       | (33,520        | )          | (5,373         | )          | —           |       | (38,893          | )          |
| Sale  of equipment and other assets                                                    |       | —            |       | 1,905          |       | 50             |       | —           |       | 1,955            |       |
| Acquisition  of The ServiceMaster Company                                              |       | (1,119            | )          | —         |       | —         |       | —           |       | (1,119           | )          |
| Other  business acquisitions, net of cash acquired                                     |       | —            |       | (7,268         | )          | —         |       | —           |       | (7,268           | )          |
| Notes  receivable, financial investments and securities, net                           |       | —            |       | —         |       | 3,968          |       | —           |       | 3,968            |       |
| **Net Cash (Used for) Provided from Investing Activities from  Continuing Operations** |       | (1,119            | )          | (38,883        | )          | (1,355         | )          | —           |       | (41,357          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Financing Activities from Continuing  Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Borrowings  of debt                                                                    |       | —            |       | —         |       | —         |       | —           |       | —           |       |
| Payments  of debt                                                                      |       | (54,635           | )          | (8,249         | )          | (1,923         | )          | —           |       | (64,807          | )          |
| Shareholders’  dividends                                                          |       | —            |       | (21,817        | )          | (21,817        | )          | 43,634           |       | —           |       |
| Debt  issuance costs paid                                                              |       | (369              | )          | —         |       | —         |       | —           |       | (369             | )          |
| Net  intercompany advances                                                             |       | 55,670            |       | (132,980       | )          | 77,310         |       | —           |       | —           |       |
| **Net Cash Provided from (Used for) Financing Activities from  Continuing Operations** |       | 666               |       | (163,046       | )          | 53,570         |       | 43,634           |       | (65,176          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Discontinued Operations:**                                           |       |              |       |           |       |           |       |             |       |             |       |
| Cash  provided from operating activities                                               |       | —            |       | —         |       | (1,209         | )          | —           |       | (1,209           | )          |
| Cash  used for investing activities                                                    |       | —            |       | —         |       | (914           | )          | —           |       | (914             | )          |
| Cash  used for financing activities                                                    |       | —            |       | —         |       | —         |       | —           |       | —           |       |
| **Net Cash Provided from Discontinued Operations**                                     |       | —            |       | —         |       | (2,123         | )          | —           |       | (2,123           | )          |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash (Decrease) Increase During the Period**                                         |       | (83,155           | )          | 6,285          |       | 39,443         |       | —           |       | (37,427          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and Cash Equivalents at End of Period**                                         |       | $                 | 217,207    |           | $          | 18,390         |       | $                | 132,563    |             | $          | — |   | $ | 368,160 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Cash Flows**

**Forthe Six Months Ended June 30, 2008**

**(inthousands)**

 
| ** **                                                                             | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash and Cash Equivalents at Beginning of Period**                                   |       | $                 | 100,429    |           | $          | 14,999         |       | $                | 91,791     |             | $          | — |   | $ | 207,219 |   |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Net Cash (Used for) Provided from Operating Activities from  Continuing Operations** |       | (76,190           | )          | 180,662        |       | (3,806         | )          | (86,742          | )          | 13,924           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Investing Activities from Continuing  Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Property  additions                                                                    |       | —            |       | (13,300        | )          | (4,821         | )          | —           |       | (18,121          | )          |
| Sale  of equipment and other assets                                                    |       | —            |       | 4,505          |       | 55             |       | —           |       | 4,560            |       |
| Acquisition  of The ServiceMaster Company                                              |       | (20,957           | )          | —         |       | —         |       | —           |       | (20,957          | )          |
| Other  business acquisitions, net of cash acquired                                     |       | —            |       | (9,847         | )          | (114           | )          | —           |       | (9,961           | )          |
| Notes  receivable, financial investments and securities, net                           |       | 1,003             |       | —         |       | 75,984         |       | —           |       | 76,987           |       |
| **Net Cash (Used for) Provided from Investing Activities from  Continuing Operations** |       | (19,954           | )          | (18,642        | )          | 71,104         |       | —           |       | 32,508           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Financing Activities from Continuing  Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Borrowings  of debt                                                                    |       | 182,000           |       | —         |       | —         |       | —           |       | 182,000          |       |
| Payments  of debt                                                                      |       | (195,625          | )          | (19,858        | )          | (1,805         | )          | —           |       | (217,288         | )          |
| Shareholders’  dividends                                                          |       | —            |       | (43,371        | )          | (43,371        | )          | 86,742           |       | —           |       |
| Debt  issuance costs paid                                                              |       | (99               | )          | —         |       | —         |       | —           |       | (99              | )          |
| Net  intercompany advances                                                             |       | 62,741            |       | (95,245        | )          | 32,504         |       | —           |       | —           |       |
| **Net Cash Provided from (Used for) Financing Activities from  Continuing Operations** |       | 49,017            |       | (158,474       | )          | (12,672        | )          | 86,742           |       | (35,387          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Discontinued Operations:**                                           |       |              |       |           |       |           |       |             |       |             |       |
| Cash  provided from operating activities                                               |       | —            |       | —         |       | 7,389          |       | —           |       | 7,389            |       |
| Cash  used for investing activities                                                    |       | —            |       | —         |       | (191           | )          | —           |       | (191             | )          |
| Cash  used for financing activities                                                    |       | —            |       | —         |       | (96            | )          | —           |       | (96              | )          |
| **Net Cash Provided from Discontinued Operations**                                     |       | —            |       | —         |       | 7,102          |       | —           |       | 7,102            |       |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash (Decrease) Increase During the Period**                                         |       | (47,127           | )          | 3,546          |       | 61,728         |       | —           |       | 18,147           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and Cash Equivalents at End of Period**                                         |       | $                 | 53,302     |           | $          | 18,545         |       | $                | 153,519    |             | $          | — |   | $ | 225,366 |   |

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**MergerAgreement**

 

On March 18,2007, ServiceMaster entered into the Merger Agreement with Holdings andAcquisition Co. The Merger Agreement provided that, upon the terms andsubject to the conditions set forth in the Merger Agreement,Acquisition Co. would merge with and into ServiceMaster, withServiceMaster as the surviving corporation.

 

On the ClosingDate, the Merger was completed, and each issued and outstanding share ofServiceMaster common stock, other than shares held by ServiceMaster or Holdingsor their subsidiaries and shares held by stockholders who validly perfectedtheir appraisal rights under Delaware law, was converted into the right toreceive $15.625 in cash. Each share of ServiceMaster common stock owned byServiceMaster, Holdings or Acquisition Co. or any of their respectivedirect or indirect wholly-owned subsidiaries was cancelled and retired, and noconsideration was paid in exchange for it.

 

Immediatelyfollowing the completion of the Merger, all of the outstanding capital stock ofHoldings, the ultimate parent company of ServiceMaster, was owned by investmentfunds sponsored by, or affiliated with, the Equity Sponsors.

 

Equitycontributions totaling $1,431 million from the Equity Sponsors, togetherwith (i) borrowings under the Interim Loan Facility, (ii) borrowingsunder a new $2,650 million senior secured term loan facility and (iii) cashon hand at ServiceMaster, were used, among other things, to finance theaggregate Merger Consideration, to make payments in satisfaction of otherequity-based interests in ServiceMaster under the Merger Agreement, to settleexisting interest rate swaps, to redeem or provide for the repayment of certainof the Company’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150 millionpre-funded letter of credit facility were used to replace and/or secure lettersof credit previously issued under a ServiceMaster credit facility that wasterminated as of the Closing Date. On the Closing Date, the Company alsoentered into, but did not draw under, the Revolving Credit Facility.

 

The Interim LoanFacility matured on July 24, 2008. On the maturity date, outstandingamounts under the Interim Loan Facility were converted on a one to one basisinto the Permanent Notes. The Permanent Notes were issued pursuant to arefinancing indenture. In connection with the issuance of Permanent Notes,ServiceMaster entered into a Registration Rights Agreement, pursuant to whichServiceMaster filed with the SEC a registration statement with respect to theresale of the Permanent Notes, which was declared effective on January 16,2009. ServiceMaster’s obligation under the Registration Rights Agreement tokeep the registration statement effective has terminated. Accordingly,ServiceMaster may choose to deregister the Permanent Notes and terminate theeffectiveness of the registration statement at any time.

 

**Resultsof Operations**

 

**SecondQuarter 2009 Compared to 2008**

 

The Companyreported second quarter 2009 revenue of $957.3 million, a $40.0 million or 4.0percent decrease compared to 2008. Revenue for the second quarter of 2008 hasbeen reduced by $11.6 million (non-cash) resulting from recording deferredrevenue at its fair value in connection with purchase accounting. Excludingthis impact of purchase accounting, revenue for the second quarter of 2009decreased $51.6 million, or 5.1 percent, from 2008 levels, driven by theresults of our business units as described in our “Segment Reviews for theSecond Quarter 2009 Compared to 2008”.

 

Operating incomewas $118.0 million for the second quarter of 2009 compared to$114.2 million for the second quarter of 2008. Income from continuingoperations before income taxes was $46.6 million for the second quarter of 2009compared to $34.8 million for the second quarter of 2008. The increase inincome from continuing operations before income taxes of $11.8 million reflectsthe net effect of:

 
| **(In millions)**                                      | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|
| Non-cash  purchase accounting adjustments(1)           |       | $          | 9.6        |   |
| Decreased  interest expense(2)                         |       | 8.8        |       |
| Decreased  interest and net investment income(3)       |       | (0.8       | )          |
| Increased  restructuring and merger related charges(4) |       | (1.3       | )          |
| Decline  in segment results(5)                         |       | (4.5       | )          |
|                                                   |       | $          | 11.8       |   |

 

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(1)           The net favorable impact of non-cash purchaseaccounting adjustments for the second quarter of 2009 compared to 2008 of $9.6million consists primarily of decreased amortization of intangible assets of$2.2 million and an $11.6 million increase in revenue resulting from recordingdeferred revenue at its fair value in conjunction with purchase accounting partiallyoffset by increased deferred customer acquisition expense of $4.3 million.

 

(2)           Represents a decrease in interest expenseas a result of decreases in our weighted average interest rates, partiallyoffset by increases in our weighted average long-term debt balances as comparedto the second quarter of 2008.

 

(3)           As further described in “Operating andNon-Operating Expenses”, represents a decrease in interest and net investmentincome.

 

(4)           Represents (i) an increase inrestructuring charges primarily resulting from Fast Forward and (ii) anincrease in Merger related charges, primarily related to change in controlseverance agreements.

 

(5)           Represents a net decrease in income fromcontinuing operations before income taxes, non-cash purchase accountingadjustments, interest expense, interest and net investment loss, gain onextinguishment of debt, merger related charges and restructuring chargesresulting from a decline in results at TruGreen LawnCare partially offset byimproved results at American Home Shield, Terminix, TruGreen LandCare, andOther Operations and Headquarters as described in our “Segment Reviews for theSecond Quarter 2009 Compared to 2008”.

 

***Operating andNon-Operating Expenses***

 

The Companyreported cost of services rendered and products sold of $553.4 million for thesecond quarter of 2009 compared to $589.7 million for the second quarterof 2008. Excluding the unfavorable non-cash reduction of revenue of $11.6million for the second quarter of 2008 resulting from recording deferredrevenue at its fair value in conjunction with purchase accounting, as apercentage of revenue, these costs decreased to 57.8 percent for the secondquarter of 2009 from 58.5 percent for the second quarter of 2008. Thisprimarily reflects the impact of improved labor efficiency and favorable damageclaim trends at Terminix, reduced fertilizer costs at TruGreen LawnCare andlower vehicle counts and reduced fuel costs for the Company, offset, in part,by increases in other factor costs throughout the enterprise.

 

The Companyreported selling and administrative expenses of $239.9 million for the secondquarter of 2009 compared to $247.1 million for the second quarter of 2008. Thesecond quarter of 2008 includes a $4.3 million (non-cash) decrease in sellingand administrative expenses resulting from recording deferred customeracquisition costs at their fair value in connection with purchase accounting.Excluding the impact of purchase accounting, these costs increased, as apercentage of revenue, to 25.1 percent for the second quarter of 2009 from24.9 percent for the second quarter of 2008. This primarily reflectsdecreased leverage of selling and administrative expenses at TruGreen LawnCare,increased compensation charges for the Company resulting from a change in themarket value of investments within an employee deferred compensation trust (forwhich there is a corresponding and offsetting change within interest and netinvestment loss), offset, in part, by lower advertising costs and provisionsfor certain legal matters at American Home Shield and lower overhead charges atOther Operations and Headquarters.

 

Amortizationexpense was $40.4 million for the second quarter of 2009 compared to$42.0 million for the second quarter of 2008. The decrease is a result ofamortization being included in the second quarter of 2008 related to finitelived intangible assets recorded in connection with the Merger which had livesof one year or less and were fully amortized as of July 24, 2008.

 

The Companyreviews goodwill and indefinite-lived intangible assets for impairment annuallyin the fourth quarter and between annual test dates in certain circumstances.The majority of the Company’s goodwill and indefinite-lived intangible assets(mainly trade names) relate to the Merger. The Company does not believe atriggering event requiring the Company to conduct an interim impairment testhad occurred as of June 30, 2009. However, due to the potential forprolonged economic softness in the markets in which we operate, the Companybelieves it is reasonably possible that we will record a non-cash impairmentcharge in the third or fourth quarter. As of June 30, 2009, the balancesof the Company’s goodwill and indefinite-lived intangible assets were $3.1billion and $2.9 billion, respectively.

 

Non-operatingexpense totaled $71.4 million for the second quarter of 2009 compared to$79.4 million for the second quarter of 2008. This change includes an$8.8 million decrease in interest expense primarily resulting fromdecreases in our weighted average interest rates, partially offset by increasesin our weighted average long-term debt balances, and a $0.8 million decrease ininterest and net investment income. Interest and net investment income wascomprised of the following for the three months ended June 30, 2009 and2008:

 

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| ** **                        | ** ** | **Three months ended********June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|
| **(In millions)**                 | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Realized  gains(1)                |       | $                                           | 2.1        |   | $ | 6.5 |   |
| Impairments  of securities(2)     |       | (0.5                                        | )          | (3.0 | ) |
| Deferred  compensation trust(3)   |       | 1.2                                         |       | (0.1 | ) |
| Other(4)                          |       | 0.6                                         |       | 0.8 |   |
| Interest  and net investment loss |       | $                                           | 3.4        |   | $ | 4.2 |   |

 

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(1)           Represents the net investment gains(losses) and the interest and dividend income realized on the American HomeShield investment portfolio.

 

(2)           Represents other than temporary declinesin the value of certain investments in the American Home Shield investmentportfolio.

 

(3)           Represents investment income (loss)resulting from a change in the market value of investments within an employeedeferred compensation trust (for which there is a corresponding and offsettingchange in compensation expense within income from continuing operations beforeincome taxes).

 

(4)           Represents a portion of the earningsgenerated by ServiceMaster Acceptance Company Limited Partnership (“SMAC”), ourfinancing subsidiary exclusively dedicated to providing financing to ourfranchisees and retail customers of our operating units, and interest income onother cash balances.

 

The effective taxrate on income from continuing operations was 51.9 percent for the secondquarter of 2009 compared to 40.1 percent for the second quarter of 2008. Thechange in the effective tax rate is primarily due to state tax expenseoffsetting the statutory federal benefit generated due to losses in 2008compared to state tax expense increasing the annual projected tax expense in2009.

 

***Restructuring and Merger Related Charges***

 

The Company isengaged in a reorganization and restructuring of certain of its businesses andsupport functions known as Fast Forward. Among the purposes of Fast Forward isto eliminate layers and bureaucracy and simplify work processes in order tobetter align the Company’s work processes around its operational and strategicobjectives. Fast Forward is being implemented in phases. The first phaseinvolved, among other things, a reduction in work force and various processimprovements, including the closing of American Home Shield’s call centerlocated in Santa Rosa, California. The second phase includes, among otherthings, the organization of certain corporate support functions into centers ofexcellence which are expected to deliver higher quality services to ourbusiness units at lower costs, the outsourcing to third party vendors ofvarious business activities that currently are handled internally, as well asother employee workforce reductions expected to result in cost-savings. Thefirst phase of Fast Forward was substantially completed in the first quarter of2008, and the second phase is underway.

 

As part of thesecond phase of Fast Forward, on December 11, 2008, the Company enteredinto an agreement with IBM pursuant to which IBM will provide informationtechnology operations and applications development services to the Company. Theinitial term of the agreement is seven years. The agreement commenced on December 11,2008 and the services were phased in during the first half of 2009. Inconnection with the agreement, the Company eliminated approximately 275positions. As a result of the elimination of positions and the transition ofinformation technology services to IBM, the Company incurred charges relatedto, among other things, employee retention and severance costs, and transitionfees paid to IBM and other consulting fees. Almost all charges related to theagreement were cash charges and were expensed throughout the transition period.Such charges amounted to approximately $3.5 million, pre-tax, during 2008 andapproximately $9.5 million, pre-tax, during the first half of 2009. Thesecharges were recorded as restructuring charges in the condensed consolidatedstatement of operations as incurred. The Company expects to continue totransition services to IBM during the remainder of 2009 and expects charges forthese services to amount to approximately $1.0 million, pre-tax. These chargeswill be recorded as restructuring charges in the condensed consolidatedstatement of operations as incurred.

 

The Companyexpects that it will incur additional costs in order to implement the secondphase of Fast Forward, but is currently unable to estimate the aggregate amountor timing of such charges or the anticipated related cash outlays. The Companyis on schedule with respect to realizing its previously forecasted savings fromFast Forward and believes that it will

 

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ultimately realizeannualized pre-tax savings of at least $60 million by the end of 2009. Most ofthese savings are expected to benefit the selling, general and administrativeline in the statement of operations.

 

In connection with FastForward, the Company incurred costs of approximately $4.5 million and $4.1million for the three months ended June 30, 2009 and 2008, respectively,which included the costs described above. For the three months ended June 30,2009, such costs included transition fees paid to IBM of approximately $3.4million, employee retention and severance costs of approximately $0.7 millionand consulting and other costs of approximately $0.4 million. For the three monthsended June 30, 2008, these charges included consulting fees ofapproximately $2.1 million and severance, lease termination and other costs ofapproximately $2.0 million.

 

For the three monthsended June 30, 2009, Terminix reversed restructuring costs ofapproximately $0.1 million relating to a branch optimization project, which wasa reduction in lease termination costs.

 

The results forthe three months ended June 30, 2008 include restructuring charges relatedto the Company’s consolidation of its corporate headquarters into itsoperations support center in Memphis, Tennessee and the closing of itsheadquarters in Downers Grove, Illinois. The transition to Memphis wassubstantially completed in 2007. Almost all costs related to the transitionwere cash expenditures, and were expensed throughout the transition period.During the three months ended June 30, 2008, the Company reversed netexpenses of approximately $0.1 million relating to this relocation.

 

During the three monthsended June 30, 2009 and 2008, the Company incurred Merger related chargestotaling $1.2 million and $0.3 million, respectively. These Merger relatedcharges include investment banking, accounting, legal, change in controlseverance and other costs associated with the Merger.

 

**KeyPerformance Indicators**

 

The table belowpresents selected operating metrics related to customer counts and customerretention for the three largest profit businesses in the Company. Thesemeasures are presented on a rolling, twelve-month basis in order to avoidseasonal anomalies.

 
| ** **                                | ** ** | **Key Performance Indicators  as of June 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                                      | ** ** | **2008** | ** ** |
| **TruGreen LawnCare(1)—**            |       |                                                          |       |   |   |
| Reduction  in Full Program Accounts(1)    |       | (3                                                            | )%         | (4 | )% |
| Customer  Retention Rate(1)               |       | 68.3                                                          | %          | 68.4 | % |
| **Terminix—**                        |       |                                                          |       |   |   |
| Growth  in Pest Control Customers         |       | 1                                                             | %          | 1 | % |
| Pest  Control Customer Retention Rate     |       | 77.9                                                          | %          | 78.5 | % |
| (Reduction)  Growth in Termite Customers  |       | (1                                                            | )%         | 2 | % |
| Termite  Customer Retention Rate          |       | 86.2                                                          | %          | 88.1 | % |
| **American Home Shield—**            |       |                                                          |       |   |   |
| (Reduction)  Growth in Warranty Contracts |       | (3                                                            | )%         | 2 | % |
| Customer  Retention Rate                  |       | 62.6                                                          | %          | 61.9 | % |

 

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(1)           During the third quarter of2008, TruGreen LawnCare changed its definition of Full Program Accounts toinclude sales in the second half of the year with the completion of the initialfull program to occur in the first half of the following year. Prior to thethird quarter of 2008 such sales were reflected as full program accounts andincluded in customer retention in the first quarter of the year following thesale. Reduction in Full Program Accounts and Customer Retention Rate for 2008have been adjusted to conform to the new definition.

 

**Segment Reviews for the SecondQuarter 2009 Compared to 2008**

 

The following business segment reviews should be read in conjunctionwith the required footnote disclosures presented in the Notes to the condensedconsolidated financial statements. This disclosure provides a reconciliation ofsegment operating income to income from continuing operations before incometaxes, with net non-operating expenses as the only reconciling item.

 

The Company uses Adjusted EBITDA and Comparable Operating Performanceto facilitate operating performance comparisons from period to period. AdjustedEBITDA and Comparable Operating Performance are supplemental measures

 

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ofthe Company’s performance that are not required by, or presented in accordancewith, GAAP. Adjusted EBITDA and Comparable Operating Performance are notmeasurements of the Company’s financial performance under GAAP and should notbe considered as alternatives to net income or any other performance measuresderived in accordance with GAAP or as alternatives to net cash provided byoperating activities or any other measures of the Company’s cash flow orliquidity. “Adjusted EBITDA” means net income before net income (loss) fromdiscontinued operations; provision (benefit) for income taxes; minorityinterest and other expense, net; interest expense and interest and netinvestment income; and depreciation and amortization expense; as well as addingback interest and net investment income and non-cash trade name impairment. “ComparableOperating Performance” is calculated by adding back to Adjusted EBITDA non-cashoption and restricted stock expense and non-cash effects on Adjusted EBITDAattributable to the application of purchase accounting in connection with theMerger.

 

The Company believes Adjusted EBITDA facilitates company-to-companyoperating performance comparisons by backing out potential differences causedby variations in capital structures (affecting net interest income andexpense), taxation and the age and book depreciation of facilities andequipment (affecting relative depreciation expense), which may vary fordifferent companies for reasons unrelated to operating performance. The Companyuses Comparable Operating Performance as a supplemental measure to assess theCompany’s performance because it excludes non-cash option and restricted stockexpense and non-cash effects on Adjusted EBITDA attributable to the applicationof purchase accounting in connection with the Merger. The Company presentsComparable Operating Performance because it believes that it is useful forinvestors, analysts and other interested parties in their analysis of theCompany’s operating results.

 

TheCompany believes Comparable Operating Performance, which excludes the impact ofpurchase accounting and non-cash option and restricted stock expenseadjustments, is useful to investors. The exclusion of the impact of these itemsfacilitates a comparison of operating results from periods pre-dating theMerger transaction with the Equity Sponsors with periods subsequent to theMerger. The purchase accounting charges were not present prior to the Merger.In addition, charges relating to option and restricted stock expense prior tothe Merger were computed under different plans and formulas than chargessubsequent to the Merger. Moreover, such charges are non-cash and the exclusionof the impact of these items from Comparable Operating Performance allowsinvestors to understand the current period results of operations of thebusiness on a comparable basis with previous periods and, secondarily, givesthe investors added insight into cash earnings available to service the Company’sdebt. We believe this to be of particular importance to the Company’s publicinvestors, which are debt holders. The Company also believes that the exclusionof the purchase accounting and non-cash option and restricted stock expenseadjustments may provide an additional means for comparing the Company’sperformance to the performance of other companies by eliminating the impact ofdifferently structured equity-based long-term incentive plans (although care mustbe taken in making any such comparison, as there may be inconsistencies amongcompanies in the manner of computing similarly titled financial measures).

 

Adjusted EBITDA and Comparable Operating Performance are notnecessarily comparable to other similarly titled financial measures of othercompanies due to the potential inconsistencies in the method of calculation.

 

Adjusted EBITDA and Comparable Operating Performance have limitationsas analytical tools, and should not be considered in isolation or assubstitutes for analyzing the Company’s results as reported under GAAP. Some ofthese limitations are:

 

·                  Adjusted EBITDA andComparable Operating Performance do not reflect changes in, or cashrequirements for, the Company’s working capital needs;

 

·                  Adjusted EBITDA andComparable Operating Performance do not reflect the Company’s interest expenseor the cash requirements necessary to service interest or principal payments onthe Company’s debt;

 

·                  Adjusted EBITDA andComparable Operating Performance do not reflect the Company’s tax expense orthe cash requirements to pay the Company’s taxes;

 

·                  Adjusted EBITDA andComparable Operating Performance do not reflect historical cash expenditures orfuture requirements for capital expenditures or contractual commitments;

 

·                  Although depreciation andamortization are non-cash charges, the assets being depreciated and amortizedwill often have to be replaced in the future, and Adjusted EBITDA andComparable Operating Performance do not reflect any cash requirements for suchreplacements;

 

·                  Other companies in theCompany’s industries may calculate Adjusted EBITDA and Comparable OperatingPerformance differently, limiting their usefulness as comparative measures; and

 

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·                  Comparable Operating Performance does not includepurchase accounting adjustments and option and restricted stock expense, thelatter of which exclusion may cause the overall compensation cost of thebusiness to be understated.

 

Operating revenues and Comparable OperatingPerformance by operating segment are as follows:

 
| ** **                                                             | ** ** | **Three months ended********June 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(In thousands)**                                                | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Operating  Revenue:                                                    |       |                                        |       |   |   |
| TruGreen  LawnCare                                                     |       | $                                           | 348,403    |   | $ | 377,296 |   |
| TruGreen  LandCare                                                     |       | 69,433                                      |       | 83,877 |   |
| Terminix                                                               |       | 307,375                                     |       | 311,774 |   |
| American  Home Shield                                                  |       | 179,823                                     |       | 167,570 |   |
| Other  Operations and Headquarters                                     |       | 52,258                                      |       | 56,788 |   |
| Total  Operating Revenue                                               |       | $                                           | 957,292    |   | $ | 997,305 |   |
| Comparable  Operating Performance:                                     |       |                                        |       |   |   |
| TruGreen  LawnCare                                                     |       | $                                           | 61,591     |   | $ | 75,336 |   |
| TruGreen  LandCare                                                     |       | 1,395                                       |       | (66 | ) |
| Terminix                                                               |       | 77,957                                      |       | 73,513 |   |
| American  Home Shield                                                  |       | 38,954                                      |       | 36,419 |   |
| Other  Operations and Headquarters                                     |       | 569                                         |       | (230 | ) |
| Total  Comparable Operating Performance                                |       | $                                           | 180,466    |   | $ | 184,972 |   |
|                                                                   |       |                                        |       |   |   |
| Memo:  Items included in Comparable Operating Performance              |       |                                        |       |   |   |
| Restructuring  charges and Merger related charges(1)                   |       | $                                           | 5,584      |   | $ | 4,310 |   |
| Management  fee(2)                                                     |       | $                                           | 500        |   | $ | 500 |   |
|                                                                   |       |                                        |       |   |   |
| Memo:  Items excluded from Comparable Operating Performance            |       |                                        |       |   |   |
| Comparable  Operating Performance of InStar                            |       | $                                           | 45         |   | $ | 133 |   |
| Comparable  Operating Performance of all other discontinued operations |       | (222                                        | )          | 1,633 |   |
| Comparable  Operating Performance of discontinued operations           |       | $                                           | (177       | ) | $ | 1,766 |   |

 

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(1)           Includes (i) charges related to FastForward, (ii) charges related to the Company’s decision to consolidate itscorporate headquarters into its operations support center in Memphis, Tennesseeand close its former headquarters in Downer’s Grove, Illinois and (iii) Mergerrelated charges.

 

(2)           Represents a management fee payable toCD&R pursuant to a consulting agreement under which CD&R provides theCompany with on-going consulting and management advisory services in exchangefor an annual management fee of $2.0 million, which is payable quarterly.On July 30, 2009, the annual management fee payable under the consultingagreement with CD&R was increased to $6.25 million.  The full year management fee will apply in2009 and the fees relating to the first three quarters of 2009 will be paid toCD&R in the third quarter of 2009.

 

In August 2009, the boards of directors of the Companyand Holdings approved consulting agreements with Citigroup, BAS and JPMorgan,each of which is an Equity Sponsor or an affiliate of an Equity Sponsor. Underthe consulting agreements, Citigroup, BAS and JPMorgan each will provide theCompany with on-going consulting and management advisory services until June30, 2016 or the earlier termination of the existing consulting agreementbetween the Company and CD&R. The Company will pay annual management feesof $0.5 million, $0.5 million and $0.25 million, respectively, to Citigroup,BAS and JPMorgan. The full year management fees will apply in 2009, and thefees relating to the first three quarters of 2009 will be paid to Citigroup,BAS and J.P. Morgan in the third quarter of 2009. A form of the consultingagreements is attached as Exhibit 10.1 and is incorporated herein by reference.The definitive agreements with Citigroup, BAS and JPMorgan are in the processof being executed.

 

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Thefollowing table presents reconciliations of operating (loss) income, the mostdirectly comparable financial measure under GAAP, to Adjusted EBITDA andComparable Operating Performance for the periods presented.

 
| **(In thousands)**                                                | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home********Shield** | ** ** | **Other  Operations &********Headquarters** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Three Months Ended June 30, 2009**                              |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Operating  income (loss)(1)                                            |       | $                      | 39,513     |                   | $          | (1,479       | )          | $                                | 62,172     |                                                 | $          | 26,607     |       | $ | (8,808 | ) | $ | 118,005 |   |
| Depreciation  and amortization expense                                 |       | 22,107                 |       | 3,037                  |       | 15,885       |       | 10,624                           |       | 5,687                                                |       | 57,340     |       |
| EBITDA  before interest and net investment income                      |       | 61,620                 |       | 1,558                  |       | 78,057       |       | 37,231                           |       | (3,121                                               | )          | 175,345    |       |
| Interest  and net investment income(2)                                 |       | —                 |       | —                 |       | —       |       | 1,672                            |       | 1,723                                                |       | 3,395      |       |
| Adjusted  EBITDA                                                       |       | 61,620                 |       | 1,558                  |       | 78,057       |       | 38,903                           |       | (1,398                                               | )          | 178,740    |       |
| Non-cash  option and restricted stock expense                          |       | —                 |       | —                 |       | —       |       | —                           |       | 1,967                                                |       | 1,967      |       |
| Non-cash  (credits) charges attributable to purchase accounting(3)     |       | (29                    | )          | (163                   | )          | (100         | )          | 51                               |       | —                                               |       | (241       | )          |
| Comparable  Operating Performance                                      |       | $                      | 61,591     |                   | $          | 1,395        |       | $                                | 77,957     |                                                 | $          | 38,954     |       | $ | 569 |   | $ | 180,466 |   |
|                                                                   |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items included in Comparable Operating Performance              |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Restructuring  charges and merger related charges(4)                   |       | $                      | —     |                   | $          | (21          | )          | $                                | (69        | )                                                    | $          | 36         |       | $ | 5,638 |   | $ | 5,584 |   |
| Management  fee(5)                                                     |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | 500 |   | $ | 500 |   |
|                                                                   |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items excluded from Comparable Operating Performance            |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Comparable  Operating Performance of InStar                            |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | 45 |   | $ | 45 |   |
| Comparable  Operating Performance of all other discontinued operations |       | —                 |       | —                 |       | —       |       | —                           |       | (222                                                 | )          | (222       | )          |
| Comparable  Operating Performance of discontinued operations(6)        |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | (177 | ) | $ | (177 | ) |
| ** **                                                             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Three Months Ended June 30, 2008**                              |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Operating  income (loss)(1)                                            |       | $                      | 55,913     |                   | $          | (2,693       | )          | $                                | 59,682     |                                                 | $          | 9,401      |       | $ | (8,124 | ) | $ | 114,179 |   |
| Depreciation  and amortization expense                                 |       | 19,402                 |       | 2,789                  |       | 14,879       |       | 12,759                           |       | 5,532                                                |       | 55,361     |       |
| EBITDA  before interest and net investment income                      |       | 75,315                 |       | 96                     |       | 74,561       |       | 22,160                           |       | (2,592                                               | )          | 169,540    |       |
| Interest  and net investment income(2)                                 |       | —                 |       | —                 |       | —       |       | 3,539                            |       | 625                                                  |       | 4,164      |       |
| Adjusted  EBITDA                                                       |       | 75,315                 |       | 96                     |       | 74,561       |       | 25,699                           |       | (1,967                                               | )          | 173,704    |       |
| Non-cash  option and restricted stock expense                          |       | —                 |       | —                 |       | —       |       | —                           |       | 1,737                                                |       | 1,737      |       |
| Non-cash  charges (credits) attributable to purchase accounting(3)     |       | 21                     |       | (162                   | )          | (1,048       | )          | 10,720                           |       | —                                               |       | 9,531      |       |
| Comparable  Operating Performance                                      |       | $                      | 75,336     |                   | $          | (66          | )          | $                                | 73,513     |                                                 | $          | 36,419     |       | $ | (230 | ) | $ | 184,972 |   |
|                                                                   |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items included in Comparable Operating Performance              |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Restructuring  charges and merger related charges(4)                   |       | $                      | 35         |                   | $          | 623          |       | $                                | —     |                                                 | $          | 448        |       | $ | 3,204 |   | $ | 4,310 |   |
| Management  fee(5)                                                     |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | 500 |   | $ | 500 |   |
|                                                                   |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items excluded from Comparable Operating Performance            |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Comparable  Operating Performance of InStar                            |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | 133 |   | $ | 133 |   |
| Comparable  Operating Performance of all other discontinued operations |       | —                 |       | —                 |       | —       |       | —                           |       | 1,633                                                |       | 1,633      |       |
| Comparable  Operating Performance of discontinued operations(6)        |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | 1,766 |   | $ | 1,766 |   |

 

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(1)                                  Presented below is a reconciliation oftotal segment operating income to net income.

 
| ** **                                              | ** ** | **Three months ended********June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Total  Segment Operating Income                         |       | $                                           | 118,005    |   | $ | 114,179 |   |
| Non-operating  expense (income):                        |       |                                        |       |   |   |
| Interest  expense                                       |       | 74,656                                      |       | 83,425 |   |
| Interest  and net investment income                     |       | (3,395                                      | )          | (4,164 | ) |
| Other  expense                                          |       | 179                                         |       | 145 |   |
| Income  from Continuing Operations before Income Taxes  |       | $                                           | 46,565     |   | $ | 34,773 |   |
| Provision  for income taxes                             |       | 24,173                                      |       | 13,947 |   |
| Income  from Continuing Operations                      |       | $                                           | 22,392     |   | $ | 20,826 |   |
| Loss  from discontinued operations, net of income taxes |       | (107                                        | )          | (2,736 | ) |
| Net  Income                                             |       | $                                           | 22,285     |   | $ | 18,090 |   |

 

(2)                                 Interest and net investment income isprimarily comprised of investment income and realized gain (loss) on ourAmerican Home Shield segment investment portfolio. Cash, short-term andlong-term marketable securities associated with regulatory requirements inconnection with American Home Shield and for other purposes totaledapproximately $286.3 million as of June 30, 2009. American Home Shieldinterest and net investment income was $1.7 million and $3.5 million for thesecond quarter of 2009 and 2008, respectively. The balance of interest andinvestment income primarily relates to (i) a portion of the earningsgenerated by SMAC, (ii) investment income from our employee deferredcompensation trust (for which there is a corresponding and offsetting change incompensation expense within income from continuing operations before incometaxes), and (iii) interest income on other cash balances.

 

(3)                                The Merger was accounted for usingpurchase accounting. This adjustment represents the aggregate, non-cashadjustments (other than amortization and depreciation) attributable to theapplication of purchase accounting.

 

(4)                                 Includes (i) charges related to FastForward, (ii) charges related to the Company’s decision to consolidate itscorporate headquarters into its operations support center in Memphis, Tennesseeand close its former headquarters in Downer’s Grove, Illinois and (iii) Mergerrelated charges.

 

(5)                                 Represents a management fee payable toCD&R pursuant to a consulting agreement under which CD&R provides theCompany with on-going consulting and management advisory services in exchangefor an annual management fee of $2.0 million, which is payable quarterly.On July 30, 2009, the annual management fee payable under the consultingagreement with CD&R was increased to $6.25 million.  The full year management fee will apply in2009 and the fees relating to the first three quarters of 2009 will be paid toCD&R in the third quarter of 2009.

 

In August 2009, the boards of directors of the Companyand Holdings approved consulting agreements with Citigroup, BAS and JPMorgan,each of which is an Equity Sponsor or an affiliate of an Equity Sponsor. Underthe consulting agreements, Citigroup, BAS and JPMorgan each will provide theCompany with on-going consulting and management advisory services until June30, 2016 or the earlier termination of the existing consulting agreementbetween the Company and CD&R. The Company will pay annual management feesof $0.5 million, $0.5 million and $0.25 million, respectively, to Citigroup,BAS and JPMorgan. The full year management fees will apply in 2009, and thefees relating to the first three quarters of 2009 will be paid to Citigroup,BAS and J.P. Morgan in the third quarter of 2009. A form of the consultingagreements is attached as Exhibit 10.1 and is incorporated herein by reference.The definitive agreements with Citigroup, BAS and JPMorgan are in the processof being executed.

 

(6)                                 The table included in “DiscontinuedOperations” presents reconciliations of operating (loss) income, the mostdirectly comparable financial measure under GAAP, to Adjusted EBITDA andComparable Operating Performance for the periods presented.

 

***TruGreen LawnCareSegment***

 

The TruGreen LawnCare segment, which includes lawn, tree and shrub careservices, reported a 7.7 percent decrease in revenue, a 29.3 percent decreasein operating income and an 18.2 percent decrease in Comparable OperatingPerformance for the second quarter of 2009 compared to 2008. The revenueresults were adversely impacted by soft customer demand. Customer counts at June 30,2009 were 2.5 percent lower than last year’s level due primarily to a declinein new unit sales as well as a 10 basis point decline in the rollingtwelve-month customer retention rate. Trends in revenue were also adverselyimpacted by discounts offered on Full Program Accounts in 2009 designed tooffset the impacts of a difficult economic environment. TruGreen LawnCareremains committed to improving customer retention by focusing on the overallquality of service delivery, including the Lawn Quality Audit program, thereduction of route manager turnover and the continued improvement of overallcommunication with customers.

 

TruGreen LawnCare’s Comparable Operating Performance declined $13.7million for the second quarter of 2009 compared to 2008, which also reflectsdecreased leverage of selling and administrative expenses, offset, in part, bylower

 

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vehiclecounts, reduced fuel and fertilizer costs and the favorable impact of acquiringassets in connection with exiting certain fleet leases in 2008.

 

***TruGreen LandCareSegment***

 

The TruGreen LandCare segment, which includeslandscape maintenance services, reported a 17.2 percent decrease in revenue, a45.1 percent decrease in operating loss and a $1.5 million increase inComparable Operating Performance for the second quarter of 2009 compared to2008. The decline in revenue included a 10.2 percent decline in base contractmaintenance revenue and a 26.8 percent decline in enhancement revenue. Revenuetrends were adversely impacted by soft customer demand.

 

TruGreen LandCare’s Comparable Operating Performanceimproved $1.5 million for the second quarter of 2009 compared to 2008, whichalso reflects improved materials management, lower vehicle fleet counts,reduced overhead spending and the favorable impact of acquiring assets inconnection with exiting certain fleet leases in 2008. These factors wereoffset, in part, by increased fuel costs.

 

***Terminix Segment***

 

The Terminix segment, which includes termite and pestcontrol services, reported a 1.4 percent decrease in revenue for the secondquarter of 2009 compared to 2008. Revenue for the second quarter of 2008 hasbeen reduced by $1.0 million (non-cash) as a result of recording deferredrevenue at its fair value in connection with purchase accounting. Excludingthis impact of purchase accounting, revenue decreased 1.7 percent for thesecond quarter of 2009 compared to 2008. Terminix reported a 4.2 percentincrease in operating income and a 6.0 percent increase in ComparableOperating Performance for the second quarter of 2009 compared to 2008. Thesegment’s overall revenue results, excluding purchase accounting, reflectedmodest growth in pest control revenues offset by a decline in revenue fromtermite contract renewals and termite completions. Pest control revenues increased2.0 percent for the second quarter of 2009 compared to 2008, reflectingincreased customer counts and improved price realization. The increase incustomer counts was driven by tuck-in acquisitions, partially offset by adecline in new unit sales and a 60 basis point decline in customerretention.  A 4.8 percent decline intermite renewal revenues for the second quarter of 2009 compared to 2008 wasdue to a 190 basis point decline in termite customer retention. Revenue fromtermite completions declined 6.7 percent for the second quarter of 2009compared to 2008, due, in part, to reduced average pricing on new termitetreatments and fewer units sold. Trends in retention and new unit sales wereadversely impacted by soft customer demand.

 

Terminix’s Comparable Operating Performance improved$4.4 million for the second quarter of 2009 compared to 2008, which alsoreflects favorable termite damage claims trends, effective management ofseasonal staffing of production and sales labor, reduced fuel costs and overheadspending and the favorable impact of acquiring assets in connection withexiting certain fleet leases in 2008.

 

***American HomeShield Segment***

 

The American Home Shield segment, which provides home servicecontracts to consumers that cover heating, ventilation, air conditioning,plumbing and other systems and appliances, reported a 7.3 percent increase inrevenue for the second quarter of 2009 compared to 2008. Revenue for the secondquarter of 2008 has been reduced by $10.6 million (non-cash) as a result ofrecording deferred revenue at its fair value in connection with purchaseaccounting. Excluding this impact of purchase accounting, American Home Shieldreported a 0.9 percent increase in revenue for the second quarter of 2009compared to 2008. The annual value of warranty contracts written increased 2.2percent, which is comprised of a 4.5 percent increase in the average price percontract offset by a 2.2 percent decline in total new contract and renewalsales units. This decline in sales units is primarily comprised of a 14.4percent decline in sales in the real estate market and a 0.7 percent decline inconsumer sales partially offset by a 2.4 percent increase in renewal sales.American Home Shield’s sales in the real estate market were significantlyimpacted by the continued softness in the home resale market throughout most ofthe country.

 

American Home Shield reported a 183.0 percentincrease in operating income and a $2.5 million increase in ComparableOperating Performance for the second quarter of 2009 compared to 2008. Theincrease in Comparable Operating Performance also reflects a decrease inadvertising spending primarily due to differences between the years in thetiming of the advertising activities and reduced provisions for certain legalmatters.

 

***Other Operationsand Headquarters Segment***

 

This segment includes the operations of ServiceMasterClean and Merry Maids, as well as the Company’s 

 

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headquartersfunctions. The segment reported an 8.0 percent decrease in revenue, an 8.4percent increase in operating loss and a $0.8 million increase in ComparableOperating Performance for the second quarter of 2009 compared to 2008. Thesegment’s Comparable Operating Performance includes the reduced provisions forincentive compensation partially offset by an increase in restructuring andMerger related charges for the second quarter of 2009 compared to 2008. TheServiceMaster Clean and Merry Maids operations reported a combined 8.2 percentdecrease in revenue for the second quarter of 2009 compared to 2008. Thedecrease in revenue resulted from decreases in product sales and otherfranchise revenues. The ServiceMaster Clean and Merry Maids operations reporteda combined increase in operating income of 0.3 percent and a decrease inComparable Operating Performance of 1.4 percent for the second quarter of 2009compared to 2008.

 

***DiscontinuedOperations***

 

The components of loss from discontinued operations,net of income taxes, and the reconciliation of operating (loss) income toAdjusted EBITDA and Comparable Operating Performance for the three months endedJune 30, 2009 and 2008 are as follows:

 
| ** **                                              | ** ** | **Three months ended********June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Operating  (loss) income                                |       | $                                           | (177       | ) | $ | 1,766 |   |
| Interest  expense                                       |       | —                                      |       | (29 | ) |
| Impairment  charge                                      |       | —                                      |       | (6,317 | ) |
| Loss  from discontinued operations, before income taxes |       | (177                                        | )          | (4,580 | ) |
| Benefit  for income taxes                               |       | (70                                         | )          | (1,844 | ) |
| Loss  from discontinued operations, net of income taxes |       | $                                           | (107       | ) | $ | (2,736 | ) |
|                                                    |       |                                        |       |   |   |
| Operating  (loss) income                                |       | $                                           | (177       | ) | $ | 1,766 |   |
| Depreciation  and amortization expense                  |       | —                                      |       | — |   |
| EBITDA  before interest and net investment income       |       | (177                                        | )          | 1,766 |   |
| Interest  and net investment income                     |       | —                                      |       | — |   |
| Adjusted  EBITDA                                        |       | (177                                        | )          | 1,766 |   |
| Non-cash  option and restricted stock expense           |       | —                                      |       | — |   |
| Non-cash  charges attributable to purchase accounting   |       | —                                      |       | — |   |
| Comparable  Operating Performance                       |       | $                                           | (177       | ) | $ | 1,766 |   |

 

**Six Months Ended June 30, 2009 Compared to 2008**

 

The Company reported revenue of $1,603.2 million for the six monthsended June 30, 2009, a $26.3 million or 1.6 percent decrease compared to2008. The revenue for the six months ended June 30, 2009 has been reducedby $33.4 million (non-cash) resulting from recording deferred revenue at itsfair value in connection with purchase accounting. Excluding this impact ofpurchase accounting, revenue for the six months ended June 30, 2009decreased $59.7 million or 3.6 percent, from 2008 levels, driven by the resultsof our business units as described in our “Segment Reviews for the Six MonthsEnded June 30, 2009 Compared to 2008”.

 

Operating income was $146.7 million in the six months ended June 30,2009 compared to operating income of $103.9 million in 2008. Income fromcontinuing operations before income taxes was $39.7 million in the six monthsended June 30, 2009 compared to loss from continuing operations beforeincome taxes of $71.3 million in 2008. The increase in income from continuingoperations before income taxes of $111.0 million primarily reflects the neteffect of:

 
| **(In millions)**                                      | ** ** | ** ** | ** **  |
|--------------------------------------------------------|------------|------------|-------------|
| Non-cash  purchase accounting adjustments(1)           |       | $          |  32.6  |   |
| Decreased  interest expense(2)                         |       | 21.7       |        |
| Decreased  interest and net investment loss(3)         |       | 0.5        |        |
| Increased  restructuring and merger related charges(4) |       | (6.7       | )           |
| Gain  on extinguishment of debt(5)                     |       | 46.1       |        |
| Improved  segment results(6)                           |       | 16.8       |        |
|                                                   |       | $          |  111.0 |   |

 

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(1)           The netfavorable impact of non-cash purchase accounting adjustments in the six monthsended June 30, 2009 of $32.6 million consists primarily of decreasedamortization of intangible assets of $12.9 million and a $33.4 million increasein revenue resulting from recording deferred revenue at its fair value inconjunction with purchase accounting partially offset by increased deferredcustomer acquisition expense of $13.9 million.

 

(2)           Represents a decrease in interest expenseas a result of decreases in our weighted average interest rates, partiallyoffset by increases in our weighted average long-term debt balances as comparedto the first half of 2008.

 

(3)           As furtherdescribed in “Operating and Non-Operating Expenses”, represents a decrease ininterest and net investment loss.

 

(4)           Represents (i) anincrease in restructuring charges primarily resulting from Fast Forward, (ii) abranch optimization project at Terminix and (iii) an increase in Merger related charges,primarily related to change in control severance agreements.

 

(5)           Represents thegain on extinguishment of debt recorded in the six months ended June 30,2009 related to the completion of open market purchases of $89.0 million inface value of our Permanent Notes.

 

(6)           Represents anincrease in income from continuing operations before income taxes, non-cashpurchase accounting adjustments, interest expense, interest and net investmentincome, merger related charges and restructuring charges supported by theimproved results at Terminix, American Home Shield and TruGreen LandCare asdescribed in our “Segment Reviews for the Six Months Ended June 30, 2009Compared to 2008”.

 

***Operating and Non-Operating Expenses***

 

The Company reported cost of services rendered and products sold of$947.8 million for the six months ended June 30, 2009 compared to $1,007.1million in 2008. Excluding the unfavorable non-cash reduction of revenue of$33.4 million for the six months ended June 30, 2008 resulting from recordingdeferred revenue at its fair value in conjunction with purchase accounting, asa percentage of revenue, these costs decreased to 59.2 percent for the sixmonths ended June 30, 2009 from 60.6 percent in 2008. This primarily reflects the impact of improvedlabor efficiency and lower vehicle fleet counts for the Company, reduced fuelcosts and favorable damage claim trends at Terminix and reduced fuel andfertilizer costs at TruGreen LawnCare, offset, in part, by other factor coststhroughout the enterprise.

 

The Company reported selling and administrative expenses of $413.7million for the six months ended June 30, 2009 compared to$418.2 million in 2008. The six months ended June 30, 2008 include a$13.9 million (non-cash) increase in selling and administrative expensesresulting from recording deferred customer acquisition costs at their fairvalue in connection with purchase accounting. Excluding the impact of purchaseaccounting, these costs decreased, as a percentage of revenue, to 25.8 percentfor the six months ended June 30, 2009 from 26.0 percent in 2008. This primarily reflects decreasedleverage of selling and administrative expenses at TruGreen LawnCare andincreased compensation charges for the Company resulting from a change in themarket value of investments within an employee deferred compensation trust (forwhich there is a corresponding and offsetting change within interest and netinvestment loss), partially offset by lower advertising costs,  provisions for certain legal matters at AmericanHome Shield and lower overhead charges at Other Operations and Headquarters.

 

Amortization expense was $80.7 million for the six months ended June 30,2009 compared to $92.6 million for 2008. The decrease is a result ofamortization being included in the first half of 2008 related to finite livedintangible assets recorded in connection with the Merger which had lives of oneyear or less and were fully amortized as of July 24, 2008.

 

The Companyreviews goodwill and indefinite-lived intangible assets for impairment annuallyin the fourth quarter and between annual test dates in certain circumstances.The majority of the Company’s goodwill and indefinite-lived intangible assets(mainly trade names) relate to the Merger. The Company does not believe a triggeringevent requiring the Company to conduct an interim impairment test had occurredas of June 30, 2009. However, due to the potential for prolonged economicsoftness in the markets in which we operate, the Company believes it isreasonably possible that we will record a non-cash impairment charge in thethird or fourth quarter.  As of June 30,2009, the balances of the Company’s goodwill and indefinite-lived intangibleassets were $3.1 billion and $2.9 billion, respectively.

 

Non-operating expense totaled $107.0 million for the six monthsended June 30, 2009 compared with $175.2 million for 2008. This changeincludes a $46.1 million gain on extinguishment of debt, a $21.7 milliondecrease in interest expense, primarily resulting from decreases in our weightedaverage interest rates, partially offset by increases in our weighted average 

 

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long-term debt balances, and a $0.5million decrease in interest and net investment loss. Interest and netinvestment loss was comprised of the following for the six months ended June 30,2009 and 2008:

 
| ** **                        | ** ** | **Six months ended********June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| **(In millions)**                 | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Realized  gains(1)                |       | $                                         | 2.8        |   | $ | 7.2 |   |
| Impairments  of securities(2)     |       | (5.9                                      | )          | (8.2 | ) |
| Deferred  compensation trust(3)   |       | 0.5                                       |       | (2.7 | ) |
| Other(4)                          |       | 1.2                                       |       | 1.8 |   |
| Interest  and net investment loss |       | $                                         | (1.4       | ) | $ | (1.9 | ) |

 

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(1)           Represents thenet investment gains (losses) and the interest and dividend income realized onthe American Home Shield investment portfolio.

 

(2)           Representsother than temporary declines in the value of certain investments in theAmerican Home Shield investment portfolio.

 

(3)           Representsinvestment income (loss) resulting from a change in the market value ofinvestments within an employee deferred compensation trust (for which there isa corresponding and offsetting change in compensation expense within incomefrom continuing operations before income taxes).

 

(4)           Represents a portion of the earningsgenerated by SMAC and interest income on other cash balances.

 

The effective tax rate on income (loss) from continuing operations wasa provision of 41.8 percent for the six months ended June 30, 2009compared to a benefit of 23.9 percent for 2008. The change in the effective taxrate is primarily due tostate tax expense offsetting the statutory federal benefit generated due tolosses in 2008 compared to state tax expense increasing the annual projectedtax expense in 2009.

 

***Restructuring and Merger RelatedCharges***

 

The Company isengaged in a reorganization and restructuring of certain of its businesses andsupport functions known as Fast Forward. Among the purposes of Fast Forward isto eliminate layers and bureaucracy and simplify work processes in order tobetter align the Company’s work processes around its operational and strategicobjectives. Fast Forward is being implemented in phases. The first phaseinvolved, among other things, a reduction in work force and various processimprovements, including the closing of American Home Shield’s call centerlocated in Santa Rosa, California. The second phase includes, among otherthings, the organization of certain corporate support functions into centers ofexcellence which are expected to deliver higher quality services to ourbusiness units at lower costs, the outsourcing to third party vendors ofvarious business activities that currently are handled internally, as well asother employee workforce reductions expected to result in cost-savings.  The first phase of Fast Forward wassubstantially completed in the first quarter of 2008, and the second phase isunderway.

 

As part of thesecond phase of Fast Forward, on December 11, 2008, the Company enteredinto an agreement with IBM pursuant to which IBM will provide informationtechnology operations and applications development services to the Company. Theinitial term of the agreement is seven years. The agreement commenced on December 11,2008 and the services were phased in during the first half of 2009. Inconnection with the agreement, the Company eliminated approximately 275positions. As a result of the elimination of positions and the transition ofinformation technology services to IBM, the Company incurred charges related to,among other things, employee retention and severance costs, and transition feespaid to IBM and other consulting fees. Almost all charges related to theagreement were cash charges and were expensed throughout the transition period.Such charges amounted to approximately $3.5 million, pre-tax, during 2008 andapproximately $9.5 million, pre-tax, during the first half of 2009. Thesecharges were recorded as restructuring charges in the condensed consolidatedstatement of operations as incurred. The Company expects to continue totransition services to IBM during the remainder of 2009 and expects charges forthe services to amount to approximately $1.0 million, pre-tax. These chargeswill be recorded as restructuring charges in the condensed consolidated statementof operations as incurred.

 

The Companyexpects that it will incur additional costs in order to implement the secondphase of Fast Forward, but is currently unable to estimate the aggregate amountor timing of such charges or the anticipated related cash outlays. The Companyis on schedule with respect to realizing its previously forecasted savings fromFast Forward and believes that it will 

 

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ultimately realizeannualized pre-tax savings of at least $60 million by the end of 2009. Most ofthese savings are expected to benefit the selling, general and administrativeline in the statement of operations.

 

In connection with Fast Forward, the Company incurred costs ofapproximately $9.8 million and $6.7 million for the six months ended June 30,2009 and 2008 respectively, which included the costs described above. For thesix months ended June 30, 2009, such costs included transition fees paidto IBM of approximately $7.2 million, employee retention and severance costs ofapproximately $1.6 million and consulting and other costs of approximately$1.0 million. For the six months ended June 30, 2008 these chargesincluded consulting fees of approximately $3.7 million and severance, leasetermination and other costs of approximately $3.0 million.

 

For the six months ended June 30,2009, Terminix incurred restructuring costs of approximately $3.1 millionrelating to a branch optimization project, which included approximately $2.8million of lease termination costs and approximately $0.3 million of severancecosts.

 

Theresults for the six months ended June 30, 2008 include restructuringcharges related to the Company’s consolidation of its corporate headquartersinto its operations support center in Memphis, Tennessee and the closing of itsheadquarters in Downers Grove, Illinois. The transition to Memphiswas substantially completed in 2007. Almost all costs related to the transitionwere cash expenditures, and were expensed throughout the transition period.During the six months ended June 30, 2008, the Company incurred anadditional $0.6 million relating to this relocation, which includes additionalseverance and other costs.

 

Duringthe six months ended June 30, 2009 and 2008, the Company incurred Mergerrelated charges totaling $1.4 million and $0.4 million, respectively. TheseMerger related charges include investment banking, accounting, legal, change incontrol severance and other costs associated with the Merger.

 

**SegmentReviews for the Six Months Ended June 30, 2009 Compared to 2008**

 

The following businesssegment reviews should be read in conjunction with the required footnotedisclosures presented in the Notes to the Condensed Consolidated FinancialStatements. This disclosure provides a reconciliation of segment operating(loss) income to (loss) income from continuing operations before income taxes,with net non-operating expenses as the only reconciling item. As noted insegment reviews for the second quarter 2009 compared to 2008, the Company usesAdjusted EBITDA and Comparable Operating Performance to facilitate operatingperformance comparisons from period to period.

 

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Operating revenues andComparable Operating Performance by operating segment are as follows:

 
| ** **                                                             | ** ** | **Six months ended********June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)**                                                | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Operating  Revenue:                                                    |       |                                      |       |   |   |
| TruGreen  LawnCare                                                     |       | $                                         | 483,069    |   | $ | 511,738 |   |
| TruGreen  LandCare                                                     |       | 136,318                                   |       | 162,529 |   |
| Terminix                                                               |       | 570,536                                   |       | 573,422 |   |
| American  Home Shield                                                  |       | 310,691                                   |       | 272,988 |   |
| Other  Operations and Headquarters                                     |       | 102,605                                   |       | 108,859 |   |
| Total  Operating Revenue                                               |       | $                                         | 1,603,219  |   | $ | 1,629,536 |   |
| Comparable  Operating Performance:                                     |       |                                      |       |   |   |
| TruGreen  LawnCare                                                     |       | $                                         | 63,788     |   | $ | 68,599 |   |
| TruGreen  LandCare                                                     |       | 9,821                                     |       | 4,631 |   |
| Terminix                                                               |       | 140,070                                   |       | 129,012 |   |
| American  Home Shield                                                  |       | 49,927                                    |       | 42,203 |   |
| Other  Operations and Headquarters                                     |       | (1,622                                    | )          | 1,702 |   |
| Total  Comparable Operating Performance                                |       | $                                         | 261,984    |   | $ | 246,147 |   |
|                                                                   |       |                                      |       |   |   |
| Memo:  Items included in Comparable Operating Performance              |       |                                      |       |   |   |
| Restructuring  charges and Merger related expenses(1)                  |       | $                                         | 14,361     |   | $ | 7,685 |   |
| Management  fee(2)                                                     |       | $                                         | 1,000      |   | $ | 1,000 |   |
|                                                                   |       |                                      |       |   |   |
| Memo:  Items excluded from Comparable Operating Performance            |       |                                      |       |   |   |
| Comparable  Operating Performance of InStar                            |       | $                                         | (199       | ) | $ | (843 | ) |
| Comparable  Operating Performance of all other discontinued operations |       | (242                                      | )          | 1,472 |   |
| Comparable  Operating Performance of discontinued operations           |       | $                                         | (441       | ) | $ | 629 |   |

 

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(1)           Includes (i) chargesrelated to Fast Forward, (ii) a branch optimization project at Terminix, (iii) chargesrelated to the Company’s decision to consolidate its corporate headquartersinto its operations support center in Memphis, Tennessee and close its formerheadquarters in Downers Grove, Illinois and (iv) Merger related charges.

 

(2)           Represents a management fee payable toCD&R pursuant to a consulting agreement under which CD&R provides theCompany with on-going consulting and management advisory services in exchangefor an annual management fee of $2.0 million, which is payable quarterly.On July 30, 2009, the annual management fee payable under the consultingagreement with CD&R was increased to $6.25 million.  The full year management feewill apply in 2009 and the fees relating to the first three quarters of 2009will be paid to CD&R in the third quarter of 2009.

 

In August 2009, theboards of directors of the Company and Holdings approved consulting agreementswith Citigroup, BAS and JPMorgan, each of which is an Equity Sponsor or anaffiliate of an Equity Sponsor. Under the consulting agreements, Citigroup, BASand JPMorgan each will provide the Company with on-going consulting andmanagement advisory services until June 30, 2016 or the earliertermination of the existing consulting agreement between the Company and CD&R.The Company will pay annual management fees of $0.5 million, $0.5 million and$0.25 million, respectively, to Citigroup, BAS and JPMorgan. The full yearmanagement fees will apply in 2009, and the fees relating to the first threequarters of 2009 will be paid to Citigroup, BAS and J.P. Morgan in the thirdquarter of 2009. A form of the consulting agreements is attached as Exhibit 10.1and is incorporated herein by reference. The definitive agreements withCitigroup, BAS and JPMorgan are in the process of being executed.

 

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The following table presents reconciliations ofoperating income (loss) to Adjusted EBITDA and Comparable Operating Performancefor the periods presented.

 
| **(In thousands)**                                                | ** ** | **TruGreen  LawnCare** | ** **   | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home********Shield** | ** ** | **Other  Operations &********Headquarters** | ** ** | **Total**    | ** ** |
|------------------------------------------------------------------------|------------|------------------------|--------------|------------------------|------------|--------------|------------|----------------------------------|------------|------------------------------------------------------|------------|--------------|------------|
| ** **                                                             | ** ** | ** **             | ** **   | ** **             | ** ** | ** **   | ** ** | ** **                       | ** ** | ** **                                           | ** ** | ** **   | ** ** |
| **Six Months Ended June 30, 2009**                                |       |                   |         |                   |       |         |       |                             |       |                                                 |       |         |       |
| Operating  income (loss)(1)                                            |       | $                      | 20,126       |                   | $          | 4,217        |       | $                                | 108,663    |                                                 | $          | 32,061       |       | $ | (18,384 | ) | $ | 146,683 |   |
| Depreciation  and amortization expense                                 |       | 43,720                 |         | 5,930                  |       | 31,449       |       | 21,027                           |       | 11,134                                               |       | 113,260      |       |
| EBITDA  before interest and net investment (loss) income               |       | 63,846                 |         | 10,147                 |       | 140,112      |       | 53,088                           |       | (7,250                                               | )          | 259,943      |       |
| Interest  and net investment (loss) income(2)                          |       | —                 |         | —                 |       | —       |       | (3,093                           | )          | 1,727                                                |       | (1,366       | )          |
| Adjusted  EBITDA                                                       |       | 63,846                 |         | 10,147                 |       | 140,112      |       | 49,995                           |       | (5,523                                               | )          | 258,577      |       |
| Non-cash  option and restricted stock expense                          |       | —                 |         | —                 |       | —       |       | —                           |       | 3,901                                                |       | 3,901        |       |
| Non-cash  (credits) charges attributable to purchase accounting(3)     |       | (58                    | )            | (326                   | )          | (42          | )          | (68                              | )          | —                                               |       | (494         | )          |
| Comparable  Operating Performance                                      |       | $                      | 63,788       |                   | $          | 9,821        |       | $                                | 140,070    |                                                 | $          | 49,927       |       | $ | (1,622 | ) | $ | 261,984 |   |
|                                                                   |       |                   |         |                   |       |         |       |                             |       |                                                 |       |         |       |
| Memo:  Items included in Comparable Operating Performance              |       |                   |         |                   |       |         |       |                             |       |                                                 |       |         |       |
| Restructuring  charges and merger related charges(4)                   |       | $                      | —       |                   | $          | (51          | )          | $                                | 3,151      |                                                 | $          | 75           |       | $ | 11,186 |   | $ | 14,361 |   |
| Management  fee(5)                                                     |       | $                      | —       |                   | $          | —       |       | $                                | —     |                                                 | $          | —       |       | $ | 1,000 |   | $ | 1,000 |   |
|                                                                   |       |                   |         |                   |       |         |       |                             |       |                                                 |       |         |       |
| Memo:  Items excluded from Comparable Operating Performance            |       |                   |         |                   |       |         |       |                             |       |                                                 |       |         |       |
| Comparable  Operating Performance of InStar                            |       | $                      | —       |                   | $          | —       |       | $                                | —     |                                                 | $          | —       |       | $ | (199 | ) | $ | (199 | ) |
| Comparable  Operating Performance of all other discontinued operations |       | —                 |         | —                 |       | —       |       | —                           |       | (242                                                 | )          | (242         | )          |
| Comparable  Operating Performance of discontinued operations(6)        |       | $                      | —       |                   | $          | —       |       | $                                | —     |                                                 | $          | —       |       | $ | (441 | ) | $ | (441 | ) |
| ** **                                                             | ** ** | ** **             | ** **   | ** **             | ** ** | ** **   | ** ** | ** **                       | ** ** | ** **                                           | ** ** | ** **   | ** ** |
| **Six Months Ended June 30, 2008**                                |       |                   |         |                   |       |         |       |                             |       |                                                 |       |         |       |
| Operating  income (loss)(1)                                            |       | $                      |  21,854 |                   | $          | (602         | )          | $                                | 102,895    |                                                 | $          |  (8,291 | )          | $ | (11,979 | ) | $ | 103,877 |   |
| Depreciation  and amortization expense                                 |       | 46,711                 |         | 5,558                  |       | 29,891       |       | 25,442                           |       | 10,991                                               |       | 118,593      |       |
| EBITDA  before interest and net investment loss                        |       | 68,565                 |         | 4,956                  |       | 132,786      |       | 17,151                           |       | (988                                                 | )          | 222,470      |       |
| Interest  and net investment loss(2)                                   |       | —                 |         | —                 |       | —       |       | (962                             | )          | (919                                                 | )          | (1,881       | )          |
| Adjusted  EBITDA                                                       |       | 68,565                 |         | 4,956                  |       | 132,786      |       | 16,189                           |       | (1,907                                               | )          | 220,589      |       |
| Non-cash  option and restricted stock expense                          |       | —                 |         | —                 |       | —       |       | —                           |       | 3,401                                                |       | 3,401        |       |
| Non-cash  charges (credits) attributable to purchase accounting(3)     |       | 34                     |         | (325                   | )          | (3,774       | )          | 26,014                           |       | 208                                                  |       | 22,157       |       |
| Comparable  Operating Performance                                      |       | $                      | 68,599       |                   | $          | 4,631        |       | $                                | 129,012    |                                                 | $          | 42,203       |       | $ | 1,702 |   | $ | 246,147 |   |
|                                                                   |       |                   |         |                   |       |         |       |                             |       |                                                 |       |         |       |
| Memo:  Items included in Comparable Operating Performance              |       |                   |         |                   |       |         |       |                             |       |                                                 |       |         |       |
| Restructuring  charges and merger related charges(4)                   |       | $                      | 316          |                   | $          | 202          |       | $                                | 57         |                                                 | $          | 448          |       | $ | 6,662 |   | $ | 7,685 |   |
| Management  fee(5)                                                     |       | $                      | —       |                   | $          | —       |       | $                                | —     |                                                 | $          | —       |       | $ | 1,000 |   | $ | 1,000 |   |
|                                                                   |       |                   |         |                   |       |         |       |                             |       |                                                 |       |         |       |
| Memo:  Items excluded from Comparable Operating Performance            |       |                   |         |                   |       |         |       |                             |       |                                                 |       |         |       |
| Comparable  Operating Performance of InStar                            |       | $                      | —       |                   | $          | —       |       | $                                | —     |                                                 | $          | —       |       | $ | (843 | ) | $ | (843 | ) |
| Comparable  Operating Performance of all other discontinued operations |       | —                 |         | —                 |       | —       |       | —                           |       | 1,472                                                |       | 1,472        |       |
| Comparable  Operating Performance of discontinued operations(6)        |       | $                      | —       |                   | $          | —       |       | $                                | —     |                                                 | $          | —       |       | $ |  629 |   | $ | 629 |   |

 

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(1)                                 Presented belowis a reconciliation of total segment operating income to net income (loss).

 
| ** **                                                    | ** ** | **Six months ended********June 30,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)**                                       | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Total  Segment Operating Income                               |       | $                                         | 146,683    |   | $ | 103,877 |   |
| Non-operating  expense (income):                              |       |                                      |       |   |   |
| Interest  expense                                             |       | 151,322                                   |       | 173,011 |   |
| Interest  and net investment loss                             |       | 1,366                                     |       | 1,881 |   |
| Gain  on extinguishment of debt                               |       | (46,106                                   | )          | — |   |
| Other  expense                                                |       | 379                                       |       | 277 |   |
| Income  (Loss) from Continuing Operations before Income Taxes |       | $                                         | 39,722     |   | $ | (71,292 | ) |
| Provision  (Benefit) for income taxes                         |       | 16,618                                    |       | (17,024 | ) |
| Income  (Loss) from Continuing Operations                     |       | $                                         | 23,104     |   | $ | (54,268 | ) |
| Loss  from discontinued operations, net of income taxes       |       | (270                                      | )          | (3,484 | ) |
| Net  Income (Loss)                                            |       | $                                         | 22,834     |   | $ | (57,752 | ) |

 

(2)                                 Interest and netinvestment loss is primarily comprised of investment income and realized gain(loss) on our American Home Shield segment investment portfolio. Cash,short-term and long-term marketable securities associated with regulatoryrequirements in connection with American Home Shield and for other purposestotaled approximately $286.3 million as of June 30, 2009. American HomeShield interest and net investment loss was $3.1 million and $1.0 millionfor the six months ended June 30, 2009 and 2008, respectively. The balanceof interest and net investment loss primarily relates to (i) a portion ofthe earnings generated by SMAC; (ii) investment income from our employeedeferred compensation trust (for which there is a corresponding and offsettingchange in compensation expense within income from continuing operations beforeincome taxes); and (iii) interest income on other cash balances.

 

(3)                                 The Merger wasaccounted for using purchase accounting. This adjustment represents theaggregate, non-cash adjustments (other than amortization and depreciation)attributable to the application of purchase accounting.

 

(4)                                 Includes (i) chargesrelated to Fast Forward, (ii) a branch optimization project at Terminix, (iii) chargesrelated to the Company’s decision to consolidate its corporate headquartersinto its operations support center in Memphis, Tennessee and close its formerheadquarters in Downers Grove, Illinois and (iv) Merger related charges.

 

(5)                                 Represents a management fee payable toCD&R pursuant to a consulting agreement under which CD&R provides theCompany with on-going consulting and management advisory services in exchangefor an annual management fee of $2.0 million, which is payable quarterly.On July 30, 2009, the annual management fee payable under the consultingagreement with CD&R was increased to $6.25 million.  The full year management feewill apply in 2009 and the fees relating to the first three quarters of 2009will be paid to CD&R in the third quarter of 2009.

 

In August 2009, theboards of directors of the Company and Holdings approved consulting agreementswith Citigroup, BAS and JPMorgan, each of which is an Equity Sponsor or anaffiliate of an Equity Sponsor. Under the consulting agreements, Citigroup, BASand JPMorgan each will provide the Company with on-going consulting andmanagement advisory services until June 30, 2016 or the earliertermination of the existing consulting agreement between the Company and CD&R.The Company will pay annual management fees of $0.5 million, $0.5 million and$0.25 million, respectively, to Citigroup, BAS and JPMorgan. The full yearmanagement fees will apply in 2009, and the fees relating to the first threequarters of 2009 will be paid to Citigroup, BAS and J.P. Morgan in the thirdquarter of 2009. A form of the consulting agreements is attached as Exhibit 10.1and is incorporated herein by reference. The definitive agreements withCitigroup, BAS and JPMorgan are in the process of being executed.

 

(6)                                 The table included in “DiscontinuedOperations” presents reconciliations of operating (loss) income, the mostdirectly comparable financial measure under GAAP, to Adjusted EBITDA andComparable Operating Performance for the periods presented.

 

***TruGreen LawnCareSegment***

 

The TruGreen LawnCaresegment reported a 5.6 percent decrease in revenue, a 7.9 percent decrease inoperating income and a 7.0 percent decrease in Comparable Operating Performancefor the six months ended June 30, 2009 compared to 2008. The revenueresults were adversely impacted by soft customer demand. Customer counts at June 30, 2009were 2.5 percent lower than last year’s level due primarily to a decline in newunit sales as well as a 10 basis point decline in the rolling twelve-monthcustomer retention rate. Trends in revenue were also adverselyimpacted by discounts offered on Full Program Accounts in 2009 designed tooffset the impacts of a difficult economic environment. TruGreen LawnCare remains committed toimproving customer retention by focusing on the overall quality of servicedelivery, including the Lawn Quality Audit program, the reduction of routemanager turnover and the continued improvement of overall communication withcustomers.

 

TruGreen LawnCare’sComparable Operating Performance declined $4.8 million for the six months endedJune 30, 2009 compared to 2008, which also reflects decreased leverage ofselling and administrative expenses, offset, in part, by effective managementof seasonal staffing of production labor, lower vehicle counts, reduced fueland fertilizer costs and the 

 

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favorable impact of acquiring assets in connectionwith exiting certain fleet leases in 2008.

 

***TruGreen LandCare Segment***

 

The TruGreen LandCaresegment reported a 16.1 percent decrease in revenue, an 800.5 percent increasein operating income and a 112.1 percent increase in Comparable OperatingPerformance for the six months ended June 30, 2009 compared to 2008. Thedecline in revenue included a 10.0 percent decline in base contract maintenancerevenue and a 29.4 percent decline in enhancement revenue. Revenue for thefirst half of 2009 was adversely impacted by TruGreen LandCare’s continuedefforts to improve the quality of its customer base with a better customer mixby pruning less profitable jobs, implementing stricter pricing on new sales,and increasing the average size of new proposals and sales. In addition,revenue trends were adversely impacted by soft customer demand.

 

TruGreen LandCare’sComparable Operating Performance improved $5.2 million for the six months endedJune 30, 2009 compared to 2008, which also reflects improved materials andlabor management, reduced overhead spending, lower vehicle fleet counts and thefavorable impact of acquiring assets in connection with exiting certain fleetleases in 2008. These factors were offset, in part, by increased fuel costs.

 

***Terminix Segment***

 

The Terminix segmentreported a 0.5 percent decrease in revenue for the six months ended June 30,2009 compared to 2008. Revenue for the six months ended June 30, 2008 hasbeen reduced by $3.2 million (non-cash) as a result of recording deferredrevenue at its fair value in connection with purchase accounting. Excludingthis impact of purchase accounting, revenue decreased 1.1 percent for thesix months ended June 30, 2009 compared to 2008. Terminix reported a5.6 percent increase in operating income and an 8.6 percent increasein Comparable Operating Performance for the six months ended June 30, 2009compared to 2008. The segment’s overall revenue results, excluding purchaseaccounting, reflected modest growth in pest control revenues offset by adecline in revenue from termite contract renewals and termite completions. Pestcontrol revenues increased 2.3 percent for the six months ended June 30,2009 compared to 2008, reflecting increased customer counts and improved pricerealization. The increase in customer counts was driven by tuck-inacquisitions, partially offset by a decline in new unit sales and a 60 basispoint decline in customer retention. A 2.6 percent decline in termite renewalrevenues for the six months ended June 30, 2009 compared to 2008 was dueto a 190 basis point decline in termite customer retention.Revenue fromtermite completions declined 6.4 percent for the six months ended June 30,2009 compared to 2008, due, in part, to reduced average pricing on new termitetreatments and fewerunits sold. Trends in retention and new unit sales were adversely impacted bysoft customer demand.

 

Terminix’s ComparableOperating Performance improved $11.1 million for the six months ended June 30,2009 compared to 2008, which includes the impact of $3.1 million ofrestructuring charges relating to a branch optimization program.  Terminix’s Comparable Operating Performancealso reflects favorable termite damage claim trends, effective management ofseasonal staffing of production and sales labor, reduced fuel costs andoverhead spending and the favorable impact of acquiring assets in connectionwith exiting certain fleet leases in 2008.

 

***American Home Shield Segment***

 

The American Home Shieldsegment reported a 13.8 percent increase in revenue for the six months ended June 30,2009 compared to 2008. Revenue for the six months ended June 30, 2008 hasbeen reduced by $30.2 million (non-cash) as a result of recording deferredrevenue at its fair value in connection with purchase accounting. Excludingthis impact of purchase accounting, revenue increased 2.5 percent for thesix months ended June 30, 2009 compared to 2008. The annualvalue of home service contracts written increased 1.2 percent, which iscomprised of a 4.6 percent increase in the average price per contract offset bya 3.3 percent decline in total new contract and renewal sales units. Thisdecline in sales units is primarily comprised of a 15.3 percent decline insales in the real estate market and a 5.1 percent decline in consumer salespartially offset by a 1.7 percent increase in renewal sales. American HomeShield’s sales in the real estate market were significantly impacted by thecontinued softness in the home resale market throughout most of the country.

 

American Home Shieldreported a 486.7 percent increase in operating income and an $7.7 millionincrease in Comparable Operating Performance for the six months ended June 30,2009 compared to 2008. The increase in Comparable Operating Performance alsoreflects a decrease in advertising spending primarily due to differencesbetween the years in the timing of advertising activities and reducedprovisions for certain legal matters.

 

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***Other Operations and Headquarters Segment***

 

The Other Operations andHeadquarters segment reported a 5.7 percent decrease in revenue, a 53.5 percentincrease in operating loss and a $3.3 million decrease in Comparable OperatingPerformance for the six months ended June 30, 2009 compared to 2008. Thesegment’s Comparable Operating Performance includes the impact of $4.5 millionof restructuring and merger related charges partially offset by reducedprovisions for incentive compensation for the six months ended June 30,2009 compared to 2008. The ServiceMaster Clean and Merry Maids operationsreported a combined 5.8 percent decrease in revenue for the six months ended June 30,2009. The decrease in revenue resulted from decreases in product sales andother franchise revenues. The ServiceMaster Clean and Merry Maids operationsreported a combined increase in operating income of 9.4 percent and anincrease in Comparable Operating Performance of 5.4 percent for six monthsended June 30, 2009 compared to 2008 driven primarily by a shift in mix ofServiceMaster Clean’s revenue to higher margin disaster restoration servicesand reduced overhead spending as compared to 2008.

 

***Discontinued Operations***

 

The components of loss fromdiscontinued operations, net of income taxes, and the reconciliation ofoperating loss (income) to Adjusted EBITDA and Comparable Operating Performancefor the six months ended June 30, 2009 and June 30, 2008 are asfollows:

 
| ** **                                              | ** ** | **Six months ended********June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Operating  (loss) income                                |       | $                                         |  (441 | ) | $ |  629 |   |
| Interest  expense                                       |       | —                                    |       | (70 | ) |
| Impairment  charge                                      |       | —                                    |       | (6,317 | ) |
| Loss  from discontinued operations, before income taxes |       | (441                                      | )          | (5,758 | ) |
| Benefit  from income taxes                              |       | (171                                      | )          | (2,274 | ) |
| Loss  from discontinued operations, net of income taxes |       | $                                         |  (270 | ) | $ |  (3,484 | ) |
|                                                    |       |                                      |       |   |   |
| Operating  (loss) income                                |       | $                                         |  (441 | ) | $ |  629 |   |
| Depreciation  and amortization expense                  |       | —                                    |       | — |   |
| EBITDA  before interest and net investment income       |       | (441                                      | )          | 629 |   |
| Interest  and net investment income                     |       | —                                    |       | — |   |
| Adjusted  EBITDA                                        |       | (441                                      | )          | 629 |   |
| Non-cash  option and restricted stock expense           |       | —                                    |       | — |   |
| Non-cash  charges attributable to purchase accounting   |       | —                                    |       | — |   |
| Comparable  Operating Performance                       |       | $                                         |  (441 | ) | $ |  629 |   |

 

**FINANCIALPOSITION AND LIQUIDITY**

 

***Cash Flows from Operating Activities from ContinuingOperations***

 

Netcash provided from operating activities from continuing operations was $71.2million for the six months ended June 30, 2009 compared to $13.9 millionfor 2008.

 

Theprincipal components (in millions) of the net increase for the six monthsended June 30, 2009 were:

 
| Increase  in net income before Merger related charges, restructuring charges,  discontinued operations and non-cash charges |   | 68.0  |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-------|--------|
| Decrease  in restructuring payments                                                                                         |   | 6.3   |   |
| Increase  in working capital requirements                                                                                   |   | (17.0 | )      |
|                                                                                                                        |   | $     | 57.3   |   |
|                                                                                                                             |        |       |        |  |

 

Theincrease in net income before Merger related charges, restructuring charges,discontinued operations and non-cash charges for the six months ended June 30,2009 was driven by Comparable Operating Performance growth at Terminix,American Home Shield, and TruGreen LandCare, lower interest expense andnon-cash purchase accounting adjustments recorded in connection with theMerger. The increase in working capital requirements for the six months ended June 30,2009 was driven primarily by decreased customer prepayments, reduced seasonalinventory growth and non-cash purchase 

 

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accounting adjustmentsrecorded in connection with the Merger.

 

***Cash Flows from Investing Activities from ContinuingOperations***

 

Netcash used for investing activities from continuing operations was $41.4 millionfor the six months ended June 30, 2009 compared to net cash provided frominvesting activities from continuing activities of $32.5 million for thesix months ended June 30, 2008 and included $1.1 million and$21.0 million paid in connection with the Merger for the six months ended June 30,2009 and 2008, respectively. Amounts paid in connection with the Merger in 2009and 2008 were primarily related to payments under change in control severanceagreements.

 

Capitalexpenditures increased to $38.9 million for the six months ended June 30,2009 from $18.1 million for the six months ended June 30, 2008 andincluded vehicle purchases of $22.0 million, recurring capital needs andinformation technology projects. The Company anticipates that capitalexpenditures for the remainder of 2009 will total approximately$30.0 million to $40.0 million, reflecting the purchases of vehiclesand the continuation of investments in information systems and productivityenhancing operating systems. The Company has no additional material capitalcommitments at this time.

 

Acquisitions,excluding the Merger, for the six months ended June 30, 2009 totaled $7.3million, compared with $10.0 million for the six months ended June 30,2008. Consideration paid for tuck-in acquisitions consisted of cash paymentsand debt payable to sellers. The Company expects to continue its tuck-inacquisition program at Terminix, TruGreen LawnCare and Merry Maids.

 

Thechange in notes receivable, financial investments and securities for the sixmonths ended June 30, 2009 and 2008 includes the net sales of marketablesecurities at American Home Shield due in part to lowering the amount of excessreserves over minimum statutory reserve requirements in certain states inaccordance with our investment policy and reduced statutory reserverequirements. During the six months ended June 30, 2008, the Company soldcertain marketable securities and subsequently invested in cash equivalents inan effort to limit our exposure to changing market conditions.

 

***Cash Flows from Financing Activities from ContinuingOperations***

 

Netcash used for financing activities from continuing operations was$65.2 million for the six months ended June 30, 2009 compared to$35.4 million for the six months ended June 30, 2008. During thefirst quarter of 2009, the Company completed open market purchases of $89.0million in face value of our Permanent Notes for a cost of $41.0 million. TheCompany also made scheduled principal payments of long-term debt of $23.8 millionduring the six months ended June 30, 2009. During the six months ended June 30,2008, the Company made borrowings of $182.0 million and repayments of $182.0million under the Revolving Credit Facility reflecting normal seasonal workingcapital needs and made scheduled principal payments of long-term debt of $35.3million.

 

***Liquidity***

 

TheMerger was completed on the Closing Date. Following the completion of theMerger, the Company is highly leveraged, and a very substantial portion of theCompany’s liquidity needs arise from debt service on indebtedness incurred inconnection with the Merger and from funding the Company’s operations, workingcapital and capital expenditures. Equity contributions totaling$1,431 million from the Equity Sponsors, together with (i) borrowingsunder the $1,150 million Interim Loan Facility, (ii) borrowings under anew $2,650 million senior secured term loan facility and (iii) cashon hand at ServiceMaster, were used, among other things, to finance theaggregate Merger Consideration, to make payments in satisfaction of otherequity-based interests in ServiceMaster under the Merger Agreement, to settleexisting interest rate swaps, to redeem or provide for the repayment of certainof the Company’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150 millionpre-funded letter of credit facility were used to replace and/or secure lettersof credit previously issued under a ServiceMaster credit facility that wasterminated as of the Closing Date. On the Closing Date, the Company alsoentered into, but did not draw under, the $500 million Revolving CreditFacility.

 

Theagreements governing the Term Facilities, the Permanent Notes and the RevolvingCredit Facility contain certain covenants that limit or restrict the incurrenceof additional indebtedness, debt repurchases, liens, sales of assets, certainpayments (including dividends) and transactions with affiliates, subject tocertain exceptions. The Company was in compliance with the covenants underthese agreements at June 30, 2009.

 

TheInterim Loan Facility matured on July 24, 2008. On the maturity date,outstanding amounts under the Interim 

 

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Loan Facility wereconverted on a one to one basis into the Permanent Notes. The Permanent Noteswere issued pursuant to a refinancing indenture. In connection with theissuance of Permanent Notes, ServiceMaster entered into a Registration RightsAgreement, pursuant to which ServiceMaster filed with the SEC a registrationstatement with respect to the resale of the Permanent Notes, which was declaredeffective on January 16, 2009. ServiceMaster’s obligation under theRegistration Rights Agreement to keep the registration statement effective hasterminated.  Accordingly, ServiceMastermay choose to deregister the Permanent Notes and terminate the effectiveness ofthe registration statement at any time.

 

ThroughJuly 15, 2011, the Company may, at its option prior to the start of anyinterest period, elect to pay interest on outstanding amounts under thePermanent Notes entirely in cash (“Cash Interest”), entirely by increasing theprincipal amount of the outstanding loans (“PIK Interest”), or 50% as CashInterest and 50% as PIK Interest. Interest payable after July 15, 2011 ispayable entirely as Cash Interest. The Company elected to pay interest payablein January 2010 entirely as Cash Interest.

 

Cashand short-term and long-term marketable securities totaled $495.3 million at June 30,2009, compared with $538.6 million at December 31, 2008. Approximately$286.3 million and $244.5 million of the cash and short-term and long-termmarketable securities balance as of June 30, 2009 and December 31,2008, respectively, is associated with regulatory requirements at American HomeShield and for other purposes. American Home Shield’s investment portfolio hasbeen invested in a combination of high quality, short duration fixed incomesecurities and equities. The Company closely monitors the performance of theinvestments. From time to time, the Company reviews the statutory reserverequirements to which its regulated entities are subject and any changes tosuch requirements. These reviews may result in identifying current reservelevels above or below minimum statutory reserve requirements, in which case theCompany may adjust its reserves. The reviews may also identify opportunities tosatisfy certain regulatory reserve requirements through alternate financialvehicles, which would enhance our liquidity.

 

Aportion of the Company’s vehicle fleet and some equipment are leased throughoperating leases. The lease terms are non-cancelable for the first twelve-monthterm, and then are month-to-month, cancelable at the Company’s option. Thereare residual value guarantees by the Company (ranging from 70 percent to84 percent of the estimated terminal value at the inception of the leasedepending on the agreement) relative to these vehicles and equipment, whichhistorically have not resulted in significant net payments to the lessors. Thefair value of the assets under all of the fleet and equipment leases isexpected to substantially mitigate the Company’s guarantee obligations underthe agreements. At June 30, 2009, the Company’s residual value guaranteesrelated to the leased assets totaled $94 million for which the Company hasrecorded the estimated fair value of these guarantees of approximately $1.8 millionin the condensed consolidated statement of financial position. We expect tofulfill our ongoing vehicle fleet needs through direct purchases of vehicles.

 

TheCompany maintains lease facilities with banks totaling $65 million, whichprovide for the financing of branch properties to be leased by the Company. At June 30,2009, approximately $65 million was funded under these facilities.Approximately $12 million of these leases are treated as capital leases andhave been included on the balance sheet as assets with related debt as of June 30,2009. The balance of the funded amount is treated as operating leases. TheCompany has guaranteed the residual value of the properties under the leases upto 73 percent of the fair market value at the commencement of the lease.At June 30, 2009, the Company’s residual value guarantees related to theleased assets totaled $53 million, for which the Company has recorded theestimated fair value of these guarantees of approximately $0.1 million in thecondensed consolidated statements of financial position. In connection with theclosing of the Merger, the Company amended these leases effective July 24,2007. Among the modifications, the Company extended the lease terms through July 24,2010. The operating lease and capital lease classifications of these leases didnot change as a result of the modifications.

 

TheCompany holds certain financial instruments that are measured at fair value ona recurring basis. The fair values of these instruments are measured using boththe market and income approaches. For investments in marketable securities,deferred compensation trust assets and derivative contracts, which are carriedat their fair values, the Company’s fair value estimates incorporate quotedmarket prices, other observable inputs (for example, interest rates) andunobservable inputs (for example, forward commodity prices) at the balancesheet date.

 

Underthe terms of its fuel swap contracts, the Company is required to postcollateral in the event that the fair value of the contracts exceeds a certainagreed upon liability level. As of June 30, 2009, the fair value of theCompany’s fuel swap contracts was a liability of $4.8 million and the Companyposted approximately $10.0 million in letters of credit as collateral for thesecontracts, $5.0 million of which were posted under the Company’s RevolvingCredit Facility. The continued use of letters of credit for this purpose couldlimit the Company’s ability to post letters of credit for other purposes andcould limit the Company’s borrowing availability under the Revolving CreditFacility. However, the Company does not expect the fair value of itsoutstanding fuel swap contacts to materially impact its financial position orliquidity.

 

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TheCompany’s ongoing liquidity needs are expected to be funded by cash on hand,net cash provided by operating activities and, as required, borrowings underthe Revolving Credit Facility and accounts receivable securitizationarrangement. We expect that cash provided from operations and availablecapacity under the Revolving Credit Facility and accounts receivablesecuritization arrangement will provide sufficient funds to operate ourbusiness, make expected capital expenditures and meet our liquidityrequirements for the following twelve months, including payment of interest andprincipal on our debt. As of June 30, 2009, the Company had $330.0 millionof remaining capacity available under the Revolving Credit Facility and $40.0million of remaining capacity under the accounts receivable securitizationarrangement.

 

The Company mayfrom time to time repurchase or otherwise retire the Company’s debt and takeother steps to reduce the Company’s debt or otherwise improve the Company’sfinancial position. These actions may include open market debt repurchases,negotiated repurchases and other retirements of outstanding debt. The amount ofdebt that may be repurchased or otherwise retired, if any, will depend onmarket conditions, trading levels of the Company’s debt from time to time, theCompany’s cash position and other considerations. Affiliates of the Company mayalso purchase the Company’s debt from time to time, through open marketpurchases or other transactions. In such cases, the Company’s debt may not beretired, in which case the Company would continue to pay interest in accordancewith the terms of the debt and the Company would continue to reflect the debtas outstanding in its statement of financial position.

 

The Company wasadvised by Holdings that, during the first quarter of 2009, Holdings completedopen market purchases of $11.0 million in face value of our PermanentNotes for a cost of $4.5 million. As of June 30, 2009,Holdings has completed open market purchases totaling $65.0 million inface value of our Permanent Notes for a cost of $21.4 million. The debtacquired by Holdings has not been retired, and the Company has continued to payinterest in accordance with the terms of the debt. During the six months ended June 30,2009, the Company recorded interest expense of $3.4 million and made cashpayments to Holdings of $3.0 million. Interest accrued by the Company andpayable to Holdings as of June 30, 2009 amounted to $3.2 million.

 

During the firstquarter of 2009, the Company completed open market purchases of$89.0 million in face value of our Permanent Notes for a cost of$41.0 million. The debt acquired by the Company has been retired, and theCompany has discontinued the payment of interest. The Company recorded a gainon extinguishment of debt of $46.1 million in its condensed consolidatedstatement of operations for the six months ended June 30, 2009 related tothese retirements. Included in the gain on extinguishment of debt arewrite-offs of unamortized debt issuance costs related to the extinguished debtof $1.9 million.

 

Inlight of the uncertainty in the credit and financial markets, in September 2008,the Company borrowed $165.0 million under its existing $500.0 million RevolvingCredit Facility to increase its cash position to preserve financialflexibility. The Company invested $125.0 million of the borrowings in moneymarket funds which were invested in short term U.S. Government securities andplaced the remaining borrowings in a money market account used to fund workingcapital needs. On July 22, 2009, the Company liquidated its investments inthese money market funds and used the proceeds to make a repayment of $125.0million under the Revolving Credit Facility.

 

The Company hasentered into an accounts receivable securitization arrangement under whichTruGreen LawnCare and Terminix sell certain eligible trade accounts receivableto Funding, the Company’s wholly-owned, bankruptcy-remote subsidiary which isconsolidated for financial reporting purposes. Funding, in turn, may transfer,on a revolving basis, an undivided percentage ownership interest of up to$50.0 million in the pool of accounts receivable to one or both of thePurchasers. The amount of the eligible receivables varies during the year basedon seasonality of the business and could, at times, limit the amount availableto the Company from the sale of these interests.

 

The accounts receivablesecuritization arrangement is a 364-day facility that is renewable annually atthe option of Funding, with a final termination date of July 17, 2012.Only one of the Purchasers is required to purchase interests under thearrangement. If this Purchaser were to exercise its right to terminate itsparticipation in the arrangement, which it may do in the third quarter of eachyear, the amount of cash available to the Company may be reduced or eliminated.As part of the annual renewal of the facility, which occurred on July 21,2009, this Purchaser agreed to continue its participation in the arrangement atleast through July 2010.

 

During the six monthsended June 30, 2009 and 2008, there were no transfers of interests in thepool of accounts receivables to Purchasers under this arrangement. As of June 30,2009, the Company had $10.0 million outstanding under the arrangement and had$40.0 million of remaining capacity available under the accounts receivablesecuritization arrangement. As of June 30, 2008, there were no amountsoutstanding under the arrangement.

 

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As a holding company, wedepend on our subsidiaries to distribute funds to us so that we may pay ourobligations and expenses, including our debt service obligations. The abilityof our subsidiaries to make distributions and dividends to us depends on theiroperating results, cash requirements and financial condition and general businessconditions. Our insurance subsidiaries and home warranty andsimilar subsidiaries (through which we conduct our American Home Shieldbusiness) are subject to significant regulatory restrictions under the laws andregulations of the states in which they operate. Among other things, such lawsand regulations require certain such subsidiaries to maintain minimum capitaland net worth requirements and may limit the amount of ordinary andextraordinary dividends and other payments that these subsidiaries can pay tous. For example, certain states prohibit payment by these subsidiaries to theCompany of dividends in excess of 10% of their capital as of the most recentyear end, as determined in accordance with prescribed insurance accountingpractices in those states. Of the $286.3 million as of June 30, 2009,which we identify as being potentially unavailable to be paid to the Company byits subsidiaries, approximately $224.3 million is held by our home warranty andinsurance subsidiaries and is subject to these regulatory limitations on thepayment of funds to us. Such limitations will be in effect throughout 2009 andsimilar limitations will be re-computed as of December 31, 2009 and willbe in effect in 2010. The remainder of the $286.3 million, or $62.0 million, isrelated to amounts that the Company’s management does not consider readilyavailable to be used to service the Company’s indebtedness due, among otherreasons, to the Company’s cash management practices and working capital needsat various subsidiaries.

 

TheCompany’s Annual Report on Form 10-K for the year ended December 31,2008 included disclosure of the Company’s contractual obligations andcommitments as of December 31, 2008. The Company continues to make thecontractually required payments and, therefore, the 2009 obligations andcommitments as listed in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2008 have been reduced by the required payments.There were no material changes outside of ordinary course of business in theCompany’s previously disclosed contractual obligations and commitments duringthe six months ended June 30, 2009.

 

***Financial Position—Continuing Operations***

 

Receivablesincreased from year-end levels, reflecting increased seasonal activity.

 

Inventoriesincreased from year-end levels, reflecting increased seasonal activity.

 

Prepaidexpenses and other assets increased from year-end levels primarily reflectingpreseason advertising costs at TruGreen LawnCare and other advertising costs ofthe Company which are incurred early in the year and deferred on an interimbasis and recognized approximately in proportion to revenue over the balance ofthe fiscal year.

 

Deferredcustomer acquisition costs increased from year-end levels, reflecting theseasonality in the lawn care operations. In the winter and spring, thisbusiness sells a series of lawn applications to customers, which are renderedprimarily in March through October. Certain incremental selling expenseswhich relate to successful sales are deferred and recognized over theproduction season and are not deferred beyond the fiscal year-end. The Companycapitalizes sales commissions and other direct contract acquisition costsrelating to lawn care, termite baiting and pest contracts, as well as home servicecontracts. These costs vary with and are directly related to a new sale and areamortized over the life of the related contract.

 

Propertyand equipment increased from year-end levels, reflecting vehicle purchases,other recurring capital purchases and information technology projects.

 

Accountspayable increased from year-end levels, reflecting increased seasonal activity.

 

Deferredrevenue increased from year-end levels, reflecting the significant amount ofcustomer prepayments recorded in the first quarter (pre-season) at TruGreenLawnCare, growth in prepaid contracts written at American Home Shield andgrowth in Termite Inspection and Protection Plan customers at Terminix.

 

Accruedself-insurance claims and related expenses increased from year-end levels,reflecting an increase in accruals for warranty claims in the American HomeShield business partially offset by a reduction in required reserve levelsunder certain of our self-insurance programs.

 

Accruedpayroll and related expenses decreased from year-end levels, reflecting thefirst quarter 2009 payment of incentive compensation related to 2008performance.

 

Otheraccrued liabilities decreased from year-end levels due primarily to reductionsin accrued interest due to 

 

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changes in the timing ofinterest payments on our permanent financing.

 

Totalshareholder’s equity was $1,178.0 million at June 30, 2009 as compared to$1,132.4 million at December 31, 2008.

 

***Financial Position—Discontinued Operations***

 

Theassets and liabilities related to discontinued operations have been classifiedin a separate caption on the condensed consolidated statements of financial position.

 

Aspart of the InStar, American Residential Services and American MechanicalServices sale agreements, the Company guaranteed obligations to third partieswith respect to bonds (primarily performance and license type), operatingleases for which the Company has been released as being the primary obligor,real estate leased and operated by the buyers, and other guarantees of payment.At the present time, the Company does not believe it is probable that thebuyers will default on their obligations subject to guarantee. The fair valueof the Company’s obligations related to these guarantees is not significant andno liability has been recorded.

 

**InformationRegarding Forward-Looking Statements**

 

This reportincludes forward-looking statements and cautionary statements. Some of theforward-looking statements can be identified by the use of forward-lookingterms such as “believes,” “expects,” “may,” “will,” “shall,” “should,” “would,”“could,” “seek,” “intends,” “plans,” “estimates,” “anticipates” or othercomparable terms. These forward-looking statements include all matters that arenot historical facts. They appear in a number of places throughout this reportand include, without limitation, statements regarding our intentions, beliefsor current expectations concerning, among other things, our results ofoperations; financial condition; liquidity; prospects; growth strategies; futureimpairments; capital expenditures; customer retention; communicationsimprovements; the continuation of tuck-in acquisitions; the impact of interestrate hedges and fuel swaps; the amounts we will pay in connection withrestructurings and reorganizations, including Fast Forward; the cost savingsfrom such restructurings and reorganizations and expected charges related to suchrestructurings and reorganizations; and the impact of prevailing economicconditions.

 

Forward-lookingstatements are subject to known and unknown risks and uncertainties, many ofwhich may be beyond our control. We caution you that forward-looking statementsare not guarantees of future performance or outcomes and that actual outcomesand performances, including, without limitation, our actual results ofoperations, financial condition and liquidity, and the development of theindustries in which we operate may differ materially from those made in orsuggested by the forward-looking statements contained in this report. Inaddition, even if our results of operations, financial condition and liquidity,and the development of the industries in which we operate are consistent withthe forward-looking statements contained in this report, those results ordevelopments may not be indicative of results or developments in subsequentperiods. A number of important factors, including the risks and uncertaintiesdiscussed in Item 1A—Risk Factors in Part I in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2008, could causeactual results and outcomes to differ materially from those in theforward-looking statements. Factors that could cause actual results andoutcomes to differ from those reflected in forward-looking statements include,without limitation:

 

·                  the effects of our substantialindebtedness and the limitations contained in the agreements governing suchindebtedness;

 

·                  our ability to generate the significantamount of cash needed to fund our operations and service our debt obligationsand debt repurchases;

 

·                  our ability to secure sources offinancing or other funding to allow for direct purchases of commercialvehicles;

 

·                  changes in interest rates;

 

·                  weather conditions and seasonalityfactors that affect the demand for our services;

 

·                  changes in the source and intensity ofcompetition in our markets;

 

·                  higher commodity prices and lack ofavailability, including fuel and fertilizers;

 

·                  increases in operating costs, such ashigher insurance premiums, self-insurance costs and health care costs;

 

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·                  employee retention, labor shortages orincreases in compensation and benefits costs;

 

·                  epidemics, pandemics or other publichealth concerns or crises;

 

·                  the risk that the benefits from FastForward may not be fully realized or may take longer to realize than expected;

 

·                  a continued downturn in general economic,financial and credit conditions in the United States and elsewhere (includingfurther deterioration or disruption in the credit and financial markets),especially as such a downturn may affect home sales, consumer or businessliquidity, consumer or commercial confidence or spending levels including as aresult of inflation or deflation, unemployment, interest rate fluctuations,mortgage foreclosures, subprime credit dislocations;

 

·                  a failure of any banking institution withwhich we deposit our funds or any insurance company that provides insurance tous;

 

·                  changes in the type or mix of our serviceofferings or products;

 

·                  existing and future governmentalregulation and the enforcement thereof, including regulation relating torestricting or banning of telemarketing, direct mail or other marketingactivities, the Termite Inspection Protection Plan, pesticides and/orfertilizers;

 

·                  the success of our current restructuringinitiatives, including the implementation of centers of excellence;

 

·                  the number, type, outcomes and costs oflegal or administrative proceedings;

 

·                  possible labor organizing activities atthe Company or its franchisees;

 

·                  risks inherent in acquisitions anddispositions;

 

·                  the timing and structuring of ourbusiness process outsourcing, including the outsourcing of portions of ourinformation technology function, and risks associated with such outsourcing;and

 

·                  other factors described from time to time in documents that we filewith the Securities and Exchange Commission.

 

You should readthis report completely and with the understanding that actual future resultsmay be materially different from expectations. All forward-looking statementsmade in this report are qualified by these cautionary statements. Theseforward-looking statements are made only as of the date of this report, and wedo not undertake any obligation, other than as may be required by law, toupdate or revise any forward-looking statements to reflect changes inassumptions, the occurrence of events, unanticipated or otherwise, changes infuture operating results over time or otherwise.

** **

Comparisons of results for current and any prior periods are not intendedto express any future trends, or indications of future performance, unlessexpressed as such, and should only be viewed as historical data.

** **

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

*InterestRate Risk*

 

TheCompany is exposed to the impact of interest rate changes and manages thisexposure through the use of variable-rate and fixed-rate debt and by utilizinginterest rate swaps. The Company does not enter into contracts for trading orspeculative purposes. The market risk associated with debt obligations andother significant instruments as of June 30, 2009 has not materiallychanged from December 31, 2008 (see Item 7A of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2008).

 

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*Fuel Price Risk*

 

TheCompany is exposed to market risk for changes in fuel prices through theconsumption of fuel by its vehicle fleet in the delivery of services to itscustomers. The Company uses approximately 28 million gallons of fuel on anannual basis. A 10% change in fuel prices would result in a change ofapproximately $7.3 million in the Company’s annual fuel cost before consideringthe impact of fuel swap contracts.

 

TheCompany uses fuel swap contracts to mitigate the financial impact offluctuations in fuel prices. As of June 30, 2009, the Company had fuelswap contracts to pay fixed prices for fuel with an aggregate notional amountof $96.8 million, maturing through 2010. The estimated fair value of thesecontracts at June 30, 2009 was a liability of $4.8 million. These fuelswap contracts provide a fixed price for approximately 90% and 75% of theCompany’s estimated fuel usage for the remainder of 2009 and 2010,respectively.

##### ** **

##### **ITEM 4T. CONTROLS AND PROCEDURES**

##### ** **

##### **Effectiveness ofDisclosure Controls and Procedures.**ServiceMaster’s Chief ExecutiveOfficer, J. Patrick Spainhour, and ServiceMaster’s Senior Vice President andChief Financial Officer, Steven J. Martin, have evaluated ServiceMaster’sdisclosure controls and procedures (as defined in Rule 15d-15(e)) as ofthe end of the period covered by this Quarterly Report on Form 10-Q.ServiceMaster’s disclosure controls and procedures include a roll-up offinancial and non-financial reporting that is consolidated in the principalexecutive office of ServiceMaster in Memphis, Tennessee. Messrs. Spainhourand Martin have concluded that both the design and operation of ServiceMaster’sdisclosure controls and procedures are effective.

##### ** **

##### **Changes in InternalControl over Financial Reporting.**No change in ServiceMaster’sinternal control over financial reporting occurred during the second quarter of2009 that has materially affected, or is reasonably likely to materiallyaffect, ServiceMaster’s internal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

**ITEM 6: EXHIBITS**

** **
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                     |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                     |
| 10.1                 |       | Form of Consulting  Agreements to be entered into among the Company, Holdings and Citigroup Alternative  Investments LLC, BAS Capital Funding Corporation and JPMorgan Chase                             |
|                 |       |                                                                                                                                                                                                     |
| 31.1                 |       | Certification of  Chief Executive Officer Pursuant to Rule 15d – 14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             |
|                 |       |                                                                                                                                                                                                     |
| 31.2                 |       | Certification of  Chief Financial Officer Pursuant to Rule 15d – 14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                             |
|                 |       |                                                                                                                                                                                                     |
| 32.1                 |       | Certification of  Chief Executive Officer Pursuant to Section 1350 of Chapter 63 of Title  18 of the United States Code, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|                 |       |                                                                                                                                                                                                     |
| 32.2                 |       | Certification of  Chief Financial Officer Pursuant to Section 1350 of Chapter 63 of Title  18 of the United States Code, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

Date: August 14,2009
|   | THE  SERVICEMASTER COMPANY                         |
|--------|----------------------------------------------------|
|   | (Registrant)                                       |
|   |                                               |
|   | By:                                                | /s/ Steven J.  Martin |
|   | Steven J. Martin                                   |
|   | Senior Vice  President and Chief Financial Officer |

 

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